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: |
October 3, 2017 |
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RE: |
Reconsideration request of Vermont Place IRB and NRA economic development assistance |
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.
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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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 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.
At the July 11, 2017 meeting, the Commission received the reconsideration request and referred it to PIRC for review and recommendation. The Commission also authorized the project to 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. A public hearing date of September 19, 2017 was set.
PIRC reviewed the request and updated analysis at their September 14, 2017 meeting and recommended, on a vote of 7-1, assistance approval for both the IRB sales tax exemption and the 10-year, 75% NRA rebate.
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
The below meetings have been scheduled for processing the request:
Oct. 3, 2017: City Commission public hearing to consider PIRC recommendation
Oct. 9, 2017: School Board to receive PIRC recommendation and consider
Oct. 11, 2017: County Commission to receive PIRC recommendation and consider request
November 7, 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.
PIRC Recommendation
PIRC reviewed the request and updated analysis at their September 14, 2017 meeting and recommended, on a vote of 7-1, assistance approval for both the IRB sales tax exemption and the 10-year, 75% NRA rebate.
City Commission Requested Action (Public Hearing, NRA 1st Reading)
Receive recommendations from the Public Incentive Advisory Committee on the request from Vermont LLC for a Neighborhood Revitalization Area (NRA) and Industrial Revenue Bond financing for a mixed-use project at 800-815 Vermont Street (Vermont Place project).
Hold a public hearing on the establishment of a Neighborhood Revitalization Area (NRA) at 800-815 Vermont Street for the Vermont Place project. After the public hearing, consider first reading of Ordinance 9303 establishing the revitalization area and approving the NRA plan, and consider Resolution 7173 authorizing Industrial Revenue Bond (IRB) financing to access a sales tax exemption on project construction materials.
School Board and County Commission Requested Action
Receive request from Vermont LLC for a 10-year, 75% Neighborhood Revitalization Area (NRA) for the Vermont Place project (800-815 Vermont Street); receive PIRC recommendation; vote on County/School District NRA participation for the project, including NRA duration and rebate level.
If NRA participation is authorized, authorize County Administrator to execute cooperative agreement between the City, County and School District on NRA administration.
City Commission Requested Action (NRA 2nd Reading)
Authorize the City Manager to execute a Cooperative agreement between the City, County and School District on NRA administration.
Authorize the City Manager to execute a Performance agreement between the City and Applicant.