Consider Approval of Tax Increment Financing (TIF) Agreement for Ramsey Hotel Group, LLC

The purpose of this case is to consider approval of the attached TIF Agreement and to make a formal recommendation to the City Council. The City and Cobblestone Hotel Development, LLC (now Ramsey Hotel Group, LLC) have entered into a PA and in the process of executing an approved First Amendment to Purchase Agreement.  The general terms of the approved Purchase Agreement and First Amendment to Purchase Agreement include a land cost write down of $311,020, and a requirement by the developer to build a 36,578 square foot 60-unit hotel, restaurant and related facilities on a 1.428 acres lot on a portion of Outlot A, COR Stone Brook Academy.  There are additional contingencies in the Purchase Agreement that include:

1. Satisfactory review of the underwriting by the Seller demonstrating the need of financial assistance in the form of a land write down of $311,020.
2. City Council approval and execution of a Tax Increment Financing Agreement between the Seller and Buyer and or its assigns.
3. City Council approval of Business Subsidy for Buyer and or its assigns.

The attached TIF Agreement has been drafted by Taft (Formerly Briggs and Morgan) and it captures the spirit of the purchase agreement and includes protections for the city that include a Minimum Assessment Agreement for 4.275M, a 5 year requirement to operate on the Development Property.

Prior to the City Council approving the TIF Agreement, if recommended by the EDA, Ehlers will re-evaluate the rate of return and need for assistance, based upon on a sworn construction statement and better defined project costs.  Being that the project is being provided upfront assistance and not a TIF Note, a look-back provision has not been included in the TIF Agreement. The City has not used a look-back provision in any of its previous TIF Projects, although this is a tool at the City's disposal. 

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. 

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  reviewed the proposed project and has it valued at $4.275M.  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 $4.275M
• Estimated Annual Property Taxes $139,000
• Filling demand for more lodging in the City of Ramsey
• High-Quality Full-Service Restaurant
• Pool
• 12FT, 13PT (25 total new jobs)
• Sale of a City parcel in the The COR with the City receiving $311,020 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 determines whether the rate of return by the Developer is within industry standards,  and is truly needed for the project to happen (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.  This will be reviewed to ensure it remains within industry standards prior to City Council consideration for approval in May.

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. 

Based on the Memo by Ehlers, Staff will work with the Developer regarding the potential for look back provisions, specifically reviewing a sworn construction statement and updated development costs prior to approval and execution of the TIF Agreement.  There currently is not any language in the TIF Agreement as it is not necessary.

It would be possible to ask for a look-back provision based on the sale of the real estate at a later date.    Markets change and determining what would be a reasonable sale amount in the future would be difficult. Also, these type of look-back provisions do not share on the downside, if a project under-performs. This practice is not common and it could be looked at as a barrier to develop in Ramsey.  In light of the current economic conditions and future growth potential, Staff believes that a look-back provision would likely be a obstacle to development and does not recommend proposing a look-back provision relating to the future sale of the real estate. 

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.

Staff recommends the EDA approve the attached TIF Agreement and recommend approval to the City Council.

Motion to recommend approval of the attached TIF Agreement and recommend approval to the City Council, subject to City Attorney approval as to legal form.