Adopt Resolution #20-022 Approving Purchase Agreement and Preliminary TIF Financing Deal Structure for Part of Outlot A, COR Stone Brook Academy; Case of Cobblestone Hotel Development, LLC
(Portions may be closed to the public)

The purpose of this case is to consider approval of Purchase Agreement and Preliminary Tax Increment Financing (TIF) Agreement Structure. This does not approve the proposed project. Traditionally, this step in the process of City Land Sale Transactions only includes consideration for the Purchase Agreement while the TIF Agreement would come at a later date. However, since the TIF Agreement is an integral part of the Land Sale Price, Staff and Ehlers (financial advisor) have done preliminary analysis to determine if assistance in the form of land write-down is warranted. Staff will bring the final version of the TIF Agreement back to the EDA and City Council at a future meeting after a more detailed review for formal recommendation to the City Council on the TIF Agreement specifically. Staff is looking for the City Council to to approve the attached purchase agreement  which includes contingencies relating to approval of Tax Increment Financing (TIF).  

The City of Ramsey and Cobblestone Hotel Development, LLC have been negotiating the terms of a purchase agreement (PA) over the past 6 months. Cobblestone has agreed to valuation of $5.00 per square foot for the land to be acquired to construct a 60 Unit, four story hotel, including a restaurant. Cobblestone has requested up front TIF Financing by the City to support a land cost write-down. The proposal would allow the city to recover the land sale price over time through the collection of Tax Increment generated by the new project. 

Depending on the final site layout it is anticipated that the project will need 1.5 to 2.0 acres . Based on this information, the value of the land ranges between $326,700 to $435,600.  For the purposes of the current PA an an acreage of 1.5 acres is being used.  If the City were to utilize up-front TIF Financing, it would constitute a business subsidy to the Developer and a Public Hearing and TIF Agreement would be required supporting the land cost write down for the developer.  The proposed value assigned to the price is within the City's approved deal range for this parcel. 

The proposed purchase agreement includes a development concept previously reviewed by the EDA and Planning Commission. The lot configuration, as currently presented allows leaves approximately 1.5 acres for a future project to the west that is currently under contract by GiGi's Salon.  Staff anticipated the Hotel site to increase slightly and the Gigi's Salon site to decrease slightly. The purchase agreements for each party will be adjusted to reflect the final square footage needed by each project. There will be no small undevelopable remnant parcels being created as part of this transaction. The time periods and extensions outlined in the term sheet and PA are consistent with the standard template.  

Notification is not required.

Observations:
The request for a Business Subsidy in the form of a land write-down (reduced sales price) triggers the need for business subsidy analysis. The Anoka County Assessor has preliminarily reviewed the proposed project and has it valued at $4.25M.  There are many positive components to construction of a 60 Unit, 4-Story Hotel with Restaurant that address EDA, City Council and community goals. They include, but are not necessarily limited to the following.

• Estimated Tax Assessed Value $4.25M
• Estimated Annual Property Taxes $139,000
• Filling demand for more lodging in the City of Ramsey
• High-Quality Full-Service Restaurant
• Pool for Hotel Guests
• 12FT, 13PT (25 total new jobs)
• Sale of a City parcel in the The COR with the City receiving $326,700 (could increase if larger tract of land is required) in TIF (Est. 9-10 year payback)
• Value of land is within the City deal range
• Parcel begins to generate taxes (currently tax exempt)
• Increased traffic/commerce to the COR

In order to ensure that the assistance is truly needed for the project to move forward, the Application has been reviewed/underwritten by Ehlers, the City's Financial Advisor.  The underwriting will address whether the rate of return by the Developer is within industry standards, is truly needed for the project to success (satisfy the TIF, "But For" Test) and includes a reasonable return on investment for the City.  Ehlers has completed the underwriting including the land write down resulting in a cash return of 4.8% and a cash on cost return of 7% by year 3, which are below industry standards.  It is clear that provision of the land cost write down is not unduly enriching the developer, but it is providing enough incentive to draw investment into the City of Ramsey.  "But-for" the provision of the incentive, the project would not occur in the City of Ramsey.

Deal Structure:
The proposed deal structure is similar to projects in Sunfish Lake Business Park and other previous TIF Developments in the City, although it has been a number of years since the City has utilized this structure.  Up-front TIF Financing in the form of reduced land sale price is being asked for by the Developer to inject more equity into the project on the front end in order to increase ratios for primary, traditional financing.  Rather than the Developer taking a TIF Note as equity in the project to be reimbursed over time and paying for the land up front as is the case with more recent projects in the COR, the Developer is asking the City to receive payment for the land over time.  The City will ultimately be made whole on the land transaction and a TIF Agreement and Minimum Assessment Agreement would be drafted to ensure this.  Staff estimated 9-10 years of TIF will be sufficient time for the payback. In other words, the City's return on investment would be delayed over time but still achieved. The City's reimbursement would come with property tax collection on the parcel, so there is little risk involved if the City finds the delayed return approach acceptable. 

The following components of the deal structure are unique to standard Purchase Agreements with the City.

• Land Sale Price/Payment
• Earnest Money (due to the amount of the Offer Price, the proposal does not include a significant amount of Earnest Money)

Based on the Memo by Ehlers, Staff will work with the Developer regarding the potential for look back provisions.  Staff will bring the final version of the TIF Agreement back to the EDA at a future meeting for review and formal recommendation to the City Council.

This case is being handled as part of normal Staff duties. If financial assistance is provided, TIF District 14 will also be a funding source.

The EDA recommended approval of the attached Purchase Agreement and Structure of Tax Increment Financing Deal Structure at the January 9, 2020 meeting.  The draft EDA minutes are attached.

Assuming that the City Council is comfortable with the structure of the payment for the land, the EDA recommends approval of Resolution #20-022 Approving Purchase Agreement and Preliminary TIF Financing Deal Structure for Part of Outlot A, COR Stone Brook Academy; subject to City Attorney approval as to legal form.

Motion to adopt Resolution #20-022 approving Purchase Agreement and Preliminary TIF Financing Deal Structure for Part of Outlot A, COR Stone Brook Academy, subject to City Attorney approval as to legal form.