Memorandum

City of Lawrence

TO:	Mayor and City Commissioners
FROM:	City Manager David L. Corliss
CC:
Date:	November 1, 2007
RE:	Request for Public Financing for Improvements related to the proposed Oread Inn

The Planning Commission is forwarding a recommendation of approval for several land use items related to the proposed Oread Inn, at the northeast intersection of 12^th and Indiana. Additionally, the Oread Inn property owner has forwarded an appeal from the determination of the Historic Resources Commission concerning the proposed project.  The City Commission will consider the Planning Commission recommendations and the appeal of the Historic Resources Commission at their meeting of November 13, 2007.  This memorandum provides information on the proposed public financing options for the proposed Oread Inn, which includes financing with a Transportation Development District (TDD) and Tax Increment Financing (TIF).

Background on Proposed Development

The proposed development is located on .746 acres and calls for a mixed use commercial development consisting of a 74 room hotel, 11,000 square feet of retail space and two floors of condominium units or extended stay units.  The developer has also discussed additional phases for redevelopment on adjacent property.  The additional phases are not currently under land use review nor are the additional phases considered for the public financing.

Tax Increment Financing Background

Tax increment financing (TIF) is a tool aimed at encouraging redevelopment activities.  TIF utilizes the incremental taxes collected from a development to pay for various public project costs associated with the development.  Once a redevelopment plan for a TIF district is created, the assessed value of the property existing prior to the project is “frozen” and all of the taxing jurisdictions, the City, the County and the School District, continue to receive those base taxes throughout the time the TIF district is in place.  Once the project is established, the difference between the new assessed valuation and the base, or the “increment” is placed into a separate fund to pay for certain project costs.  It is important to note that TIF is not a tax abatement since the developer is still obligated to pay all taxes required of any development.  The segregation and application of those taxes to pay for project costs is the distinguishing factor.  A TIF district can be in place for a maximum of 20 years.

Taxes

within

TIF District

Base

After Project

Increment

Completion

Transportation Development Districts

Transportation Development Districts (TDDs) are a rather recent tool authorized by the Kansas Legislature.  TDD financing is a special sales tax implemented within a specified district whose property owners unanimously petition for its establishment.  The TDD sales tax can be in any increment from .10% or .25% to a maximum of 1% for a period up to 22 years.  The TDD funds can be designated to finance various transportation-related projects, including streets, sidewalks, intersections, parking lots, parking garages and other related infrastructure. 

Gary Anderson, City bond counsel with Gilmore & Bell, will be present at the Commission meeting of November 6 to discuss TIF and TDD.  There are a number of important procedures under both statutory requirements which will be reviewed.

City’s 900 block of New Hampshire TIF

The City’s only other experience with Tax Increment Financing (TIF) is the 900 New Hampshire block redevelopment.  As approved by the required redevelopment plan, the redevelopment was to include: a 400+ parking garage supporting the new Arts Center, downtown parking needs and the private redevelopment; a mixed use (retail, office, residential) building to be located at the northwest corner of 10^th and New Hampshire; a commercial/retail/office building to located north of the Lawrence Arts Center; and a hotel to be located north of parking garage.  To date, there has been no private redevelopment north of either the Arts Center or the parking garage.  This lack of private redevelopment has significantly reduced the City’s expected revenues for the retirement of the debt associated with the parking garage and the New Hampshire street improvements.  While the private redevelopment along New Hampshire was projected to contribute approximately 50% of the necessary TIF revenue to finance the improvements, the actual revenue is significantly less than projected.

	City of Lawrence
	TIF District Financial Summary
	2004	2005	2006	2007
Revenue
TIF assessments	$17,032	$28,059	$34,999	$41,425
Expenditures
Debt	773,056	775,056	780,506	779,519
Amount paid by
property taxes	$756,024	$746,997	$745,507	$738,094
The TIF bonds are designated as the Series 2000-F issue.  The bonds
were issued in the amount of $8,645,000.  The first principal payment
was deferred until September 2004.  The final principal payment is
scheduled for September 2020.  As shown above, the annual
principal and interest payment varies from $775,000 to $780,000.

The TIF bonds were not guaranteed by the developer, instead the City’s general obligation backed the bonds, meaning that the City at-large is required to retire the debt along with any TIF revenue which is received.  While the new parking garage is an important public facility serving the Arts Center and downtown (September 2007 afternoon car count averaged 197 cars), the expected downtown redevelopment envisioned with the Downtown 2000 project has not occurred requiring the City at-large to finance substantially more than the projected 50% coverage of the debt.  

Policy Issues for Consideration

There are a number of significant policy issues for Commission consideration regarding the proposed use of either TDD or TIF.

Appropriateness of TDD and TIF

TDD provides for an additional sales tax to be placed solely on the sales generated on the developer’s property and can only be accomplished with the property owner’s request.  There does not appear to be a negative consequence to the City or other taxing entities in the use of the tax (e.g. the tax does not appear likely to reduce other City revenues, negatively impact other retailers, etc.).  To some extent, a TDD is similar to a special assessment benefit district requested by a developer to finance improvements.  Bonds issued with TDD and TIF revenue can be either backed by the City’s general obligation (the City pays if the TDD and TIF revenue is not sufficient) or backed solely by the developer.  It is possible to have a third party, such as a bank, guarantee sufficient revenue on behalf of the developer’s interest.  The Oread Inn developer has indicated that there will be no City at-large financial contribution for the project other than incremental revenue generated by the project.  The appropriateness of the use of TIF includes analysis and judgment as to whether the incremental sales tax and property tax revenues (the TIF revenues) are needed in order to make the development financially feasible.  Staff is not able to provide a recommendation on this question at this time.  Additional financial information is needed from the developer related to the private and public costs.  Additionally, the statutorily required feasibility study is needed in order to make this analysis.

Eligible Project Costs

Attached is the current draft list provided by the Oread Inn developer of proposed expenses eligible for reimbursement for TIF and TDD funding.  Staff received this list on October 31, 2007 and is examining the items from several points:  are the expenses eligible for reimbursement?  Do the expenses represent a reasonable estimate of the proposed costs?  Does staff recommend that these expenses be included as reimbursable TIF and/or TDD expenses?   Staff will provide a recommendation for this issue after further analysis.

Next Step in Analysis

The next step recommended by staff is the execution of a funding agreement whereby the developer agrees to fund the City’s costs associated with bond counsel work and the feasibility study up to $25,000. If the project proceeds, these costs would be included as reimbursable expenses.  A copy of that agreement, provided by the City’s bond counsel, is attached.