Memorandum

City of Lawrence

City Manager’s Office

 

TO:              David L. Corliss, City Manager

CC:               Diane Stoddard, Assistant City Manager

FROM:          Britt Crum-Cano, Economic Development Coordinator

DATE:           September 20, 2011

RE:               Property Tax Abatement Request for Grandstand Sportsware and Glassware

 

Background

 

Based in Lawrence, Kansas, Grandstand is a custom screen printer specializing in sportsware, glassware and promotional items. Beginning operations as an apparel company with 7 employees in 1988, this local business has experienced rapid expansion, currently supporting 51 full-time employees and selling products throughout the U.S., Canada, and Australia.  The company’s rapid expansion prompted the move from its original warehouse location at 315 NE Industrial Lane to the current location at 2920 Haskell, where it occupies 30,000 square feet of space.  Continued success through niche markets such as the Craft Brew industry is driving company expansion, necessitating the need for additional space to accommodate company growth.

 

Currently, Grandstand needs to expand their physical space and add employees to support long-term growth.  After an extensive search for suitable properties in Lawrence and surrounding communities, the company entered into a contract to purchase the former Sauer-Danfoss property located at 3840 Greenway Circle in Lawrence’s East Hills Business Park.  The move into the 155,000 square foot building will give the company the opportunity to grow and expand.  Closing on the property is scheduled for September 25, 2011.

 

Project Overview

 

Grandstand is requesting a property tax abatement to help facilitate the property purchase, company relocation and subsequent expansion.  Overall project investment totals $4,990,000, and covers the building purchase, remodeling, machinery, roof replacement, and major repairs or replacements to several of the heating and cooling units, driveways, and parking lots.  However, not all estimates have been received.  It is anticipated that once final estimates are in, the project will meet or exceed $5,000,000.

 

Current and Historic Property Value

 

The proposed redevelopment area will occur on one parcel of property (Plate #U13387A).  The total appraised value of land and improvements (2011) for this parcel is $5,950,000. This property was previously under a ten year abatement given to the former owners.  Through this program, the property had an 80% tax abatement that was implemented in multiple phases.  Table 1 shows the resulting taxes for the property during the abatement program.

 

Table 1—Property taxes under previous tax abatement program

 

Year

Tax Amount

1999

$44,000

2000

$43,000

2001

$47,000

2002

$45,500

2003

$46,900

2004

$46,300

2005

$48,500

2006

$50,900

2007

$51,000

2008

$56,700

2009

$176,000

                                    Source:   Douglas County Appraiser

 

The property was fully on the tax rolls in 2010, at which time property taxes were $186,900

 

Incentive Request – Property Tax Abatement

 

On September 8, 2011, Grandstand (3840 Greenway Circle LLC) submitted a formal application to the City of Lawrence, seeking approval of an annual property tax abatement of 65% given over a ten year period. 

 

According to the application, property tax relief is needed to “service the debt we are incurring, provide necessary repairs, free cash flow for inventory, and help us to be more competitive with our east and west coast business.  That will allow our company to continue to grow at or higher than our current rate.”

 

Tax Abatement Requirements and Eligibility Amount

 

The City of Lawrence Economic Development Goals, Process, and Procedures (approved March 24, 2009 and updated May 18, 2010) outlines the requirements for consideration of a tax abatement and eligibility amounts.  According to the policy (section 1-2121), the City shall only grant a tax abatement to a business which meets the legal requirements for a tax abatement and which indicates in their application that they will fully comply with five requirements.  Table 2 compares these five policy requirements to the project’s estimated compliance (as per information provided by the applicant).

 

Table 2—Policy Eligibility Requirements

 

Eligibility Item

Policy Requirement

Threshold

Project Delivers

1

Business is environmentally sound

Not specified

Building will meet Energy Star criteria.

2

Business pays all employees in the abated project an average wage per employment category that meets or exceeds the average in the community as determined annually by the Kansas Department of Human Resources Wage Survey.

$36,500 (2)

$38,495 (3)

3

The business pays all covered employees a wage, at or above, an amount which is equal to one hundred thirty percent (130%) of the federal poverty threshold for a family of three (3), as established by the United States Department of Health and Human Services.

$11.58/hour (1)

$10.00/hr starting wage for 90 day training period.  $12.00/hr wage after training.

4

The business provides one of the following:

 

 

4-A

(A) The availability of covered employees to obtain an employer-sponsored health insurance policy, pursuant to employer guidelines, in which case the employer provides a minimum of seventy percent (70%) of the cost of such policy

70% of policy cost

High deductible plan: 100% of costs paid for employee

Low deductible plan: 94% of cost paid for employee

-OR-

-OR-

-OR-

 

4-B

(B) As an alternative to offering an employer-sponsored health insurance policy, the employer shall pay the covered employee a wage which is at least $1.50 per hour above the amount required in (3.) above.

$13.08 ($11.58 + $1.50)

n/a

5

Positive Benefit/Cost ratio

1.25 or higher

1.43

 

 

 

(1)    Wage floor requirement applies to all employees in the abated project, except for temporary employees working fewer than 100 hours per calendar year, students or seasonal workers not employed longer than 90 calendar days, or new employees undergoing a bona fide or certified job training program for no more than 60 calendar days.

 

(2)    Kansas Department of Labor, Annual Wage Survey

 

(3)    Annual wages based on the total wages paid divided by the number of employees in August 2011.  Includes regular and overtime hours.
The policy (section 1-2123) provides a basic schedule that the City can use as a guideline in determining the amount of tax abatement to be granted.  According to these guidelines, the Grandstand request is eligible for annual tax abatements up to 65% of property taxes for a 10 year period.  Table 3 shows Grandstand’s tax abatement eligibility amount.

 

Table 3—Tax Abatement Eligibility Amount

 

Abatement Amount

City Policy

Project Eligibility

Meets Requirement

Up to 50%

Minimum 3 years on DC Tax Roll

Paid since 1988

Yes

Minimum $5,000,000 investment

$5,000,000 (est.)

Minimum 20 new jobs that meets or exceeds the requirements outlined in Section 1-2122.

83 net new full-time jobs, Average annual salary of $38,500

Yes

Additional 10%

Minimum 3 years on DC Tax Roll

Paid since 1988

Yes

Additional 5%

Located in a targeted development location as defined by the City Commission, or a site that already has infrastructure in place such as an existing business park.

Property located in East Hills Business Park

Yes

 

 

It should be noted that tax abatement amounts specified in the policy are guidelines only.  According to the policy, the governing body may vary the amount, maximum, and duration of the abatement provided the net abatement to a business shall not reduce the net tax revenues as would be received pursuant to the schedules to the local taxing units over ten (10) years.

 

 

Benefit-Cost Analysis

 

The property’s most recently appraised value (2011) is approximately $5,950,000 ($5,274,470 for improvements, $675,500 for land).  However, the property has been vacant for more than a year, during which time it has undergone substantial deterioration.  Consequently, this analysis assumes the base property value is the same as the anticipated property purchase price plus estimated improvements ($4,990,000) over the abatement period.

 

Grandstand currently employs 51 full-time staff, with an estimated 83 additional full-time employees added during the abatement period (134 total).  Estimated part-time positions were not provided by the applicant and were excluded from the calculations.  Typically, part-time positions have minimal impact on the local taxing districts.

 

Staff conducted an analysis of the benefits and costs associated with the project.  The analysis shows that the 1.25 threshold for the benefit-cost ratio will be met as the City will realize a benefit-cost ratio of 1.43, the County will realize a ratio of 1.87 and the School District will realize a ratio of 4.33.  This means that for every dollar of additional costs and tax abatements, the City will receive $1.43, the County will receive $1.87 and USD 497 will receive $4.33 of revenue.  The State does not have a benefit-cost ratio as there are no costs involved.  

 

Overall, the model estimates the total value of incentives at $1,076,777 with the project delivering positive returns for all jurisdictions over the ten year abatement period.  The model estimates that there will be approximately $3,320,200 in total discounted (present value) dollars of additional revenue for all jurisdictions.

 

Table 4—Discounted Revenues by Jurisdiction

 

Jurisdiction

Revenues with Incentives (discounted)

B-C Ratio

Lawrence

$364,196

1.43

Douglas County

$294,891

1.87

USD 497

$577,218

4.33

State of Kansas

$1,993,896

n/a

Total

$3,230,202

 

 

 

During the same period, providing incentives will reduce property taxes to the jurisdictions by approximately $721,600 in discounted dollars over the abatement period. 

 

Table 5 —Impact on Property Taxes

 

Total Returns (discounted)

Returns without Incentives

$3,951,805

Returns with Incentives

$3,230,202

Incentives Impact on Property Taxes

($721,603)

 

Additional Considerations

 

In addition to the results of the benefit-cost analysis, the policy specifies that additional factors may also be considered (section 1-2106) for granting property tax abatements, including:

 

 

Applicant estimates that the project will add 83 net new jobs, expanding their employee base from 51 current employees to 134 full-time employees over the abatement period.

 

 

Applicant estimates that 95% of new goods produce in Lawrence will be sold outside of Lawrence and Douglas County.

 

 

Applicant estimates that 40% of additional operating expenditures for the business will be made in Lawrence.

 

It should be noted that the policy also encourages meeting certain economic objectives, including:

 

 

 

Employees participate in formal training, including operation and maintenance of machines, one-on-one instruction on graphics design for artists, on-the-job training in customer service, quality assurance, machine operation, warehousing, shipping and receiving, purchasing, creative art, production, and pre-press preparation.

 

In addition, the Applicant will be participating in the Kansas Industrial Training Program (KIT) administered by the Kansas Department of Commerce, Workforce Services.  This program helps firms creating new jobs with on-the-job and/or classroom training.

 

 

Finally, Horizon 2020 specifies that business within select industries should particularly be a focus of economic development efforts, including “Light Manufacturing and Distribution”, which is applicable for the current project under consideration.

 

Industrial Revenue Bonds (IRBs)

 

Based upon Grandstand’s application and follow up discussions with Mr. Piper, it appears that Grandstand plans on subleasing a portion of the building.  State law does not allow a tax abatement to be granted in these cases under the State’s Constitutional Amendment provisions.  However, a property tax abatement can be considered in conjunction with a City issuing Industrial Revenue Bonds for the project.  Industrial Revenue bonds are a conduit financing mechanism whereby the City issues bonds for a company but is not responsible for any of the principal and interest payments.  Under IRB statutes, a 100% property tax abatement must be granted, but the City can require a Payment in Lieu of Taxes (PILOT) to be paid every year and that payment is distributed amongst the taxing jurisdictions as typical property tax revenue.  With this consideration, the City Commission will be receiving a request to issue IRBs at its upcoming meeting on September 20th, in conjunction with the abatement request.  The abatement to be considered will be 100%, but with the required PILOT equal to 35%, it is equivalent to the 65% abatement requested.  Additionally, Mr. Piper has indicated that 3840 Greenway Circle, LLC is the legal entity that will actually own the building and will lease it to Screen-It Graphics of Lawrence, Inc. dba Grandstand.  Thus, 3840 Greenway Circle will be entity to which bonds would be issued and Screen-It Graphics/Grandstand would be responsible for the performance provisions. 

 

Performance Agreement

 

Per the City’s policies, Grandstand would be required to enter into a performance agreement with the City so that annual performance targets are reviewed.  There will be performance targets in the areas of capital investment, job creation, wages and health insurance benefits.  The compliance with each of the annual performance targets will be averaged together to determine a “blended percentage” of compliance, which then determines the total amount of incentive to be received.  The performance targets will generally be in line with the application submitted by the applicant, upon which the analysis is based.  If a company does not perform in a given year and the amount of incentive is proposed to be reduced from the full amount, a company has the ability to appeal to the Public Incentives Review Committee and then to the City Commission.  The City Commission can consider restoring the incentive, based upon majority vote. 

 

  Table 6—Tax Abatement Performance Schedule

 

 

Blended Percentage Range

Amount of incentive to be received

90-100%

100%

80-89%

85%

70-79%

75%

Below 70%

No incentive

 

 

 

Recommendations

 

Given the City’s policy guidelines and the project’s alignment with overarching economic development goals and objectives, staff recommends approval of Grandstand’s request for an annual 65% property tax abatement for a period of 10 years.

 

The Public Incentives Review Committee (PIRC) approved 7-0 the Applicant’s request for a 65% property tax abatement for a period of 10 years at their meeting on September 13, 2011 and forwarded the request to the City Commission for consideration on September 20, 2011.

 

Requested Action

 

The City Commission should hold a public hearing to consider the Applicant’s request for a net 65% annual property tax abatement (100% tax abatement with a required PILOT equal to 35%) for a period of 10 years and, if appropriate, consider adopting Resolution No. 6947, authorizing the issuance of up to $5 million in industrial revenue bonds to finance the costs of acquiring, renovating, and equipping an industrial facility for the benefit of 3840 Greenway Circle, LLC (Grandstand).