Memorandum
City of Lawrence
City Manager’s Office
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TO: |
Tom Markus, City Manager |
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CC: |
Diane Stoddard, Assistant City Manager Casey Toomay, Assistant City Manager |
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FROM: |
Britt Crum-Cano, Economic Development Coordinator |
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DATE: |
July 11, 2017 |
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RE: |
Reconsideration request of Vermont Place IRB and NRA economic development assistance |
Please see List of Attachments at the end of this memo.
Request Overview
Vermont LLC is requesting reconsideration of a 10-year, 75% Neighborhood Revitalization Area (NRA) rebate and an Industrial Revenue Bonds (IRB) sales tax exemption on construction materials to support the development of two vacant parcels, located at approximately 800-815 Vermont Street in the Downtown Lawrence business district, into a mixed-use, commercial and residential project.
This request was originally considered in December 2016 by the City Commission, but did not proceed. The Applicant is requesting reconsideration given the City did not have of an economic development policy in place at the time that addressed affordable housing requirements (The new policy, adopted January 2017, specifies affordable housing requirements.) and the Applicant is now proposing removal of any personal residence within the project from participating in receiving NRA rebates.
Project parameters have not changed since the original request, including those of the affordable housing unit the Applicant will provide. However, project expense and revenue assumptions have been revised to reflect current real estate market and property tax conditions.
In addition, the Applicant is requesting the project be considered under the original fee schedule for NRAs and IRBs that was in place at the time the project was originally considered and allow the original dedication of one affordable housing unit for this project, since current policy does not address rounding when the required set-aside percentage equates to a partial unit.
Should this request proceed, Vermont LLC is requesting the City, Douglas County and USD 497 each participate in the NRA program. The City, County, and School District individually decide their participation in the NRA and each will conduct a public meeting to consider the request. The IRB sales tax exemption is considered only by the City. (Scheduled meetings are shown on the attached request process calendar.)
Project Overview
Project parameters have not changed since originally proposed:
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Vermont Place Project (with Underground Parking) |
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Level |
Type |
Size (SF) |
# Units |
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Basement |
Underground Parking |
10,695 |
22 |
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Floor 1: |
Commercial |
7,788 |
Tenant Dependent |
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Floor 2: |
Office |
6,504 |
30 |
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Floor 3: |
Residential Condominiums |
7,957 |
11 |
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Floor 4: |
Residential Condominiums |
6,474 |
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Floor 5: |
Private Condominium |
2,845 |
1 |
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Total Rentable SF: |
14,292 |
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Total Saleable SF: |
17,276 |
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Gross SF: |
42,263 |
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Unchanged from the original request, the Applicant will also provide one, fully finished condo and underground parking space to be held in perpetuity as affordable housing.
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AH Assumptions |
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SF |
# Units |
# BD |
# Pkg |
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600 |
1 |
1 |
1 |
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Applicant's Affordable Housing Subsidy |
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AH Unit |
Market Unit |
Subsidy |
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Sales Proceeds |
$91,086 |
$129,438 |
$38,352 |
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Finishing Costs ($102/SF)* |
$61,200 |
$0 |
$61,200 |
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Parking Space (Basement) |
$54,340 |
$0 |
$54,340 |
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Total |
$206,627 |
$129,438 |
$153,892 |
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*Fully Finished Unit |
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Actions to Date
Originally a Request Letter and Incentives Application were received May 18, 2016 from the Applicant requesting a 10-year Neighborhood Revitalization Area (NRA) with an 85% rebate provided annually for years 1 through 5 and a 50% rebate provided annually for years 6 through 10. Industrial Revenue Bond (IRB) financing was also requested in order to receive a sales tax exemption on construction materials.
As a result of gap analysis findings, the Applicant submitted a revised Request Letter and Incentives Application on October 10, 2016 requesting a 10-year Neighborhood Revitalization Area (NRA) with a 75% rebate provided annually. Industrial Revenue Bond (IRB) financing was also requested to receive a sales tax exemption on construction materials expenses.
The request was considered by the Affordable Housing Advisory Board (AHAB) at their October 10, 2016 meeting. AHAB voted 6 to 0, with one abstention, to recommend the affordable housing aspects of the project to the City Commission.
The request was considered by PIRC at their November 1, 2016 meeting. PIRC reviewed the request and voted 4 to 2 to recommend the project, as requested (75% NRA rebate, 10-year period) to the City Commission.
The City Commission received AHAB’s and PIRC’s recommendation at their December 6, 2016 meeting. However, the project was not approved at the 10-year, 75% NRA rebate level and did not proceed to the County or School Board for NRA consideration.
Revised Analysis
The National Development Council (NDC) has performed an updated gap analysis given the below current assumptions to determine if the project requires assistance.
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815 Vermont Update Assumptions: May 31, 2017 |
Source |
Impact |
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1. Escalate hard costs by 5.05% |
Turner Construction - http://www.turnerconstruction.com/cost-index |
· Increase project cost. |
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· Increase depreciation benefit |
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· Increase sales tax |
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2. Escalate rents and expenses by 3% |
Per original analysis - year 2 – T. Jackson |
· Adjusts NOI |
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· Adjusts max debt given DCR and LTV |
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· Adjusts cash flow to investor |
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3. Escalate condo sales by 2% |
Average annual increase 2016-17, per B. Eldridge, Douglas Co. Assessor – 20170531 |
· Increase sale revenues |
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· Reduce need for debt, equity and gap assistance |
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4. Escalate condo valuation by 2% |
Per B. Eldridge, Douglas Co. Assessor – 20170531 |
· Increase project valuation |
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· Increase property taxes |
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· Increase NRA rebate amount |
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5. Escalate commercial valuation by 2% |
Average annual increase - per B. Eldridge, Douglas Co. Assessor - 20170531 |
· Increase project valuation |
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· Increase property taxes |
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· Increase NRA rebate amount |
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6. Increase initial loan rate to 4.75% |
Given Fed hikes to discount rate in 2017 |
· Downward adjustment to maximum loan amount |
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· Reduces cash flow to investor |
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7. Increase refinance rate for Y6 to 6.25% |
Given Fed hikes to discount rate in 2017 and expected future rates |
· Reduces cash flow to investor |
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8. Decrease max DCR to 1.20 given improvement in market |
T. Jackson |
· Increases maximum loan amount |
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9. Set loan to max by DCR and LTV (T. Jackson) |
T. Jackson |
· Adjusts previous loan amount to reflect changes in NOI, underwriting criteria and interest rate |
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10. Decrease Investor Tax Rate to 28% (T. Jackson) |
T. Jackson – more realistic than original 35% |
· Decreases depreciation benefit |
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· Increase cash flow after tax. |
As per the latest report, NDC concludes:
“NDC’s analysis of the Project’s proposed financing sources and uses, projected net operating revenue, net condominium sales proceeds, property appreciation and associated returns on invested equity suggests that a NRA rebate of 75% of available property tax increment over 10 years, combined with an IRB sales tax exemption on eligible project costs is reasonable.”
City Staff has completed an updated benefit-cost analysis as per NDC’s updated assumptions and assuming the Applicant’s personal residence will not receive NRA rebates. Benefit-cost ratios meet policy requirements for the City and County, exceeding the preferred 1.25 ratio threshold.
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Vermont Place |
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Description |
City |
County |
USD* |
State* |
Total Value |
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10 Year, 75% NRA Rebate |
1.82 |
2.74 |
n/a |
n/a |
$1,019,888 |
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Stand-alone IRB for Sales Tax Exemption |
$283,621 |
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Total |
$1,303,508 |
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*As no new residents are anticipated to be generated from the project, the model assumes the State and School District do not have additional costs. |
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Future Actions
At the July 11, 2017 City Commission meeting, the Applicant will present the reconsideration request. The City Commission to decide if they wish to pursue the request. If the project reconsideration is to proceed, the City Commission to determine:
· If the project will be considered under the Neighborhood Revitalization Area Policy in place at the original time of application, allowing the fee schedule that was in place at the time the project was originally considered and the acceptance of the original dedication of one affordable housing unit for the project.
· Refer request to PIRC for review and recommendation and set a public hearing date for September 19, 2017 on proposed NRA and Revitalization Plan.
If the request proceeds, the below meetings have been tentatively scheduled:
TBD: Public Incentives Review Committee to review request and provide recommendation to City, County, and USD 497 School Board
Sept. 19, 2017: City Commission public hearing to receive PIRC recommendation
Sept. 25, 2017: School Board to receive PIRC recommendation and consider request
Sept. 27, 2017: County Commission to receive PIRC recommendation and consider request
October 3, 2017: City Commission final action on request
A request processing calendar is included as an attachment at the end of this memo.
Staff Position on Project Reconsideration
Staff generally views the project favorably since it would support several community goals, including in-fill and density development, environmental responsibility via LEED construction, adding affordable housing stock (specifically home ownership inventory) to the community, reducing rather than adding pressure on public parking, supporting area businesses and Downtown vibrancy, and increasing the tax base (both during and after the incentive period). Further, since the initial request was presented before the current economic development policy was approved, it seems reasonable that the project be re-evaluated. In addition, shielding the owner’s personal residence within the project from receiving NRA rebates addresses perceptions of undue personal enrichment.
Requested City Commission Action
Receive reconsideration request from Vermont Place LLC for economic development assistance to support a mixed-use development to be located at 815 Vermont Street. If appropriate, City Commission to refer the request to PIRC for review and recommendation and set a public hearing date for August 1, 2017 on proposed NRA and Revitalization Plan.
List of Attachments: Vermont Place NRA & IRB