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But-For Determination Report
Jefferson City, Missouri
Capital Mall Tax Increment Financing Plan October 18, 2013
1 PURPOSE............................................................................... 1
2 EXECUTIVE SUMMARY ............................................................. 2
3 THE PROJECT ........................................................................ 3
4 REDEVELOPMENT COSTS ........................................................ 4
Site Acquisition ......................................................................... 5 Hard Costs .............................................................................. 5 Soft Costs ............................................................................... 5
5 INCENTIVE REQUEST ............................................................... 7
6 RETURN ANALYSIS ................................................................. 8
7 BUT FOR CONCLUSION .......................................................... 12
Mission Statement
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and management advisory services to public
and non-profit organizations, and works with them
in the long-term process of building their communities
on a fiscally sound and well-managed basis.
Table of Contents
Purpose 1
Jefferson City, Missouri. Capital Mall TIF Plan, “But For” Determination Report
1. Purpose
The report that follows is pursuant to Missouri Statutes 99.800 et seq. relative to
a determination that the proposed Project within the proposed TIF
Redevelopment Plan would not reasonably be anticipated to be developed without
adoption of tax increment financing.
We have approached this determination based on the proposed Projects’ plans
regarding redevelopment costs, outcomes, financing sources, and timing, to
develop a measure of the Developer’s expected return when compared to the
amount of risk. If a project is owned and operated as an investment, a measure
of return is calculated considering the time value of money, and involves an
assumed sale of the property at a price appropriate in the market place. The final
determination is based on whether or not a potential return is reasonable without
the requested incentive, within the current marketplace and at the present time.
The anticipated total captured revenue includes TIF (100% of PILOTS & 50%
of EATS), and CID Sales Tax (1.0% sales tax, 50% captured as EATS). The
Developer is seeking a public incentive based on the captured TIF and CID
revenue as defined above.
Executive Summary 2
Jefferson City, Missouri. Capital Mall TIF Plan, “But For” Determination Report
2. Executive Summary
The calculated internal rates of return with and without the incentive request,
based on the project costs and operating revenues of the proposed project are
shown in the tables below. Determining if a project would occur without
incentive requires the testing of various assumptions which have a material affect
on the calculated unleveraged internal rate of return. We have tested the
sensitivity of the return without incentive by varying the cost and the revenue
assumptions, each independently and then collectively. The reason for testing
sensitivity is to illustrate the magnitude with which project assumptions would
have to change in order for the project to be considered feasible without
incentive. Table A below, details the significant findings of the sensitivity
analysis:
Table A
Without Incentive
Sensitivity Analysis
Change Necessary to be
Feasible
Rate of Return
without Incentive
Decreased Costs 26% Decrease 8.79%
Increased Revenue 35% Increase 8.77%
Combined Cost and
Revenue Changes
15% Decreased Costs
15% Increase Rev 8.81%
The table above indicates the magnitude at which project assumptions would
have to change for the project to have a feasible rate of return without incentive.
Based on the Korpacz/Price Waterhouse Cooper Real Estate Investor Survey
the current range of unleveraged market returns for a project of this nature is
5.50% to 12.00%, with an average of 8.791% which we used as our feasibility
benchmark. Absent the changes outlined above, the project would not attract a
market return sufficient to warrant investment . We believe changes of these
magnitudes are an unlikely realization which indicates the proposed project
would not likely be completed through private enterprise alone.
Table B, below, illustrates the Developer’s rates of return with and without
incentive:
Table B
Base
Developer
Pro Forma
(Unleveraged)
With
Incentive
Without
Incentive
10.88% 3.78%
The Project 3
Jefferson City, Missouri. Capital Mall TIF Plan, “But For” Determination Report
3. The Project
The Capital Mall TIF Plan proposes the redevelopment of the Capital Mall,
which is located on approximately 78.26 acres of land at the northeast corner of
Highway 50 and South Country Club Drive/West Truman Boulevard. The
Developer, Capital Mall JC, LLC, an affiliate of Farmer Holding Company,
proposes the redevelopment of the approximately 200,000 square foot mall
through improvements to the parking lot, exterior structure/façade improvements,
and interior façade improvements. The TIF plan does not propose the
redevelopment of the mall anchor spaces, which are not owned by the Developer.
Additionally, the plan proposes the development and sale of three new pad sites.
The Developer is anticipating project costs related to land acquisition, hard costs
related to the redevelopment of the exterior and interior of the mall, and soft costs
and contingencies associated with the redevelopment.
Redevelopment Costs 4
Jefferson City, Missouri. Capital Mall TIF Plan, “But For” Determination Report
4. Redevelopment Costs
The total cost of the project is detailed in Table C below.
Table C
Total Project Cost* Total Cost Developer TIF**
CID (Non-TIF
Captured)
Land Acquisition $11,000,000 $11,000,000 $- $-
Hard Construction Costs
Parking Lot Renovations $1,500,000 $- $1,000,000 500,000
Solar Panels 115,000 - 57,500 57,500
Common Area HVAC Units 202,500 - 152,500 50,000
Replacement Retail Merchandising Units (RMUs) 500,000 - 400,00 100,000
Waterproofing 18,000 - 13,000 5,000
Exterior Landscaping 150,000 - - 150,000
Interior Common Area Painting 45,000 - 45,000 -
Common Area Ceiling/Lighting 300,000 - 300,000 -
Interior Landscaping 100,000 - - 100,000
Interior Furniture Seating Area 36,000 - 36,000 -
Mall Entrances 1,000,000 - 900,000 100,000
Exterior Improvements 1,000,000 - 900,00 100,000
Interior Façade Improvements 750,000 - 660,975 89,025
Pylon Signs 250,000 - 250,000 -
Roofing Replacement 1,200,000 - 1,200,000 -
Replace Common Area Floor 850,000 - 850,000 -
Annual Maintenance and Repairs 2,300,00 2,300,000 - -
Common Area and Tenant Improvements 10,000,000 4,319,976 2,840,012 2,840,012
Total Hard Construction Costs $20,316,500 $6,619,976 $9,604,987 $4,091,537
Soft Renovation Costs
Architectural & Engineering $350,000 $100,000 $125,000 $125,000
General Conditions 100,000 - 50,000 50,000
Taxes, Insurance, & Appraisal 50,000 - 25,000 25,000
Financing Costs/Construction Interest 1,000,000 400,000 300,000 300,000
Administrative/Overhead 300,000 100,000 100,000 100,000
Legal 250,000 100,000 75,000 75,000
Survey 50,000 - 25,000 25,000
Developer Fee 1,015,825 415,825 300,000 300,000
Total Soft Renovation Costs $3,115,825 $1,115,825 $1,000,000 $1,000,000
Contingency
Hard Cost Contingency (10%) $2,031,650 $2,031,650 $- $-
Soft Cost Contingency (20%) 420,000 420,000 - -
Total Contingency Costs $2,451,650 $2,451,650 $- $-
Grand Total $36,883,975 $21,187,451 $10,604,987 $5,091,537
Percentages of Total Cost by Category 100% 57.44% 28.75% 13.80%
*The TIF plan states the amounts listed above are estimates and subject to
change as actual costs are incurred and incentives received. TIF and CID
reimbursable project costs are not limited by categories set forth in the worksheet
Redevelopment Costs 5
Jefferson City, Missouri. Capital Mall TIF Plan, “But For” Determination Report
above, and all TIF and CID reimbursable project costs shall be reimbursed
pursuant to a mutually acceptable development agreement between the
Developer, City, and CID, all pursuant to, and in compliance with, the CID Act
and TIF Act, as applicable. Reimbursable project costs for TIF and CID are Net
Present Valued assuming 7.5% discount rate and based on reimbursement to
Developer on an as -collected basis.
**Includes $5,091,537 in revenue from the proposed CID 1% Sales Tax, which
is contingent upon creation of the CID and imposition of the CID Sales Tax.
Land Acquisition The land acquisition cost line-item totals $11,000,000 and is based on the
Developer’s actual cost for purchasing the property. The Developer acquired the
property based on the property’s Net Operating Income (NOI) and a 12%
capitalization rate. The Developer is not seeking any reimbursement for costs
associated with the acquisition.
Hard Construction Costs This cost category is for expenses related to the direct redevelopment of the mall
site. The costs are associated with the renovation of the parking lot, the interior
and exterior façade improvements, and numerous structural building
improvements. A significant number of these line-items will be funded entirely
from a combination of TIF and CID revenues; and thus will be reimbursed on an
as incurred basis. The Developer has indicated a significant portion of these line-
items are necessary to maintain the operation of the building.
The largest of these two line-items are for costs related to; (i) Annual
Maintenance/Repairs and (ii) Common Area (CA) and Tenant Improvements
(TI). The Developer will entirely fund the Annual Maintenance line-item. The
CA and TI line-item is projected to be funded from a mix of Developer funds and
public resources. The cost is based on a total leasable square footage for the
mall of approximately 500,000 square feet and a $20 per square foot cost
assumption. The Developer has indicated the TI cost category will be for
expenses incurred in maintaining the economic vitality of the development
through the attraction of new tenants and the relocation of existing tenants.
Soft Renovation Costs The soft cost category includes the following expenses shown in Table D on the
next page.
Redevelopment Costs 6
Jefferson City, Missouri. Capital Mall TIF Plan, “But For” Determination Report
Table D
Soft Renovation Costs Total Cost Developer TIF CID
Architectural & Engineering $350,000 $100,000 $125,000 125,000
General Conditions 100,000 - 50,000 50,000
Taxes, Insurance, Appraisal 50,000 - 25,000 25,000
Financing Costs/Const. Interest 1,000,000 400,000 300,000 300,000
Administrative/Overhead 300,000 100,000 100,000 100,000
Legal 250,000 100,000 75,000 75,000
Survey 50,000 - 25,000 25,000
Developer Fee 1,015,825 415,825 300,000 300,000
Total Soft Costs $3,115,825 $1,115,825 $1,000,000 $1,000,000
The total amount of projected soft-costs related to the redevelopment of the
property is $3,115,825; for which the Developer is seeking $2,000,000 in
reimbursement from TIF and CID.
The Developer indicated the Architecture and Engineering line-item is based on
3.5% of the hard construction costs.
The General Conditions cost estimate is based on approximately 1% of the total
hard construction costs, not including the annual maintenance and CA & TI line-
items.
The Financing Cost/Construction Interest line-item is an estimate based on
project experience, and the likelihood of financing fees being incurred in securing
the various loans associated with the project.
The Administrative/Overhead is estimated at 3% of the total hard construction
costs, not including the annual maintenance and CA & TI line-items.
The legal and survey line-items are based on the scope of the project and
previous development experience.
The Developer fee is based on 5% of Hard Costs.
In the “Return Analysis” section of the report we discuss the sensitivity of the
rate of return to changes in the project costs, and the effect on the return of a
decrease in project costs.
Incentive Request 7
Jefferson City, Missouri. Capital Mall TIF Plan, “But For” Determination Report
5. Incentive Request
The preliminary financing plan for the development, which this review is based
upon, is shown in Table E below:
Table E
The Developer is seeking financing from TIF and CID sources on a pay-as-you-
go basis. The preliminary estimate for the total amount of incentive requested
from these sources is $15,696,524. The Developer has estimated the TIF and
CID revenue will produce sufficient funds to secure private financing through
$12,557,220 of up-front loan proceeds, based on the future TIF/CID revenue
stream at 1.25 coverage and an interest rate of 7.5%. As this but-for analysis is
based on the likelihood of the project occurring without incentive we have
maintained the Developer’s interest rate assumption for the with-incentive
scenario.
The Developer has assumed 2% annual inflation of property tax revenue and 1%
annual inflation of sales tax in preparing their revenue projections.
The Developer is proposing the private equity/debt amount will be split between
a prime interest rate loan of $7,800,000 at a 4.5% interest rate and a 20-year
term, a construction loan of $7,838,323 at a 5.75% interest rate and a 10-year
term, and private equity of $8,688,424 for the with incentive scenario.
Project Financing Sources
Reimbursed by TIF: $10,604,987
Reimbursed by CID: $5,091,537
Private Debt/Equity: $21,187,451
Total Sources $36,883,975
Total Public Sources $15,696,524
Return Analysis 8
Jefferson City, Missouri. Capital Mall TIF Plan, “But For” Determination Report
6. Return Analysis
Utilizing the operating pro forma prepared by the Developer we evaluated the
need for incentive for the proposed development by comparing the potential
return with and without incentive. The Developer provided a 10 -year operating
pro forma for the development which included the build-out, operating revenue
and expense assumptions. The Developer demonstrated the potential return
through a leveraged internal rate of return (IRR) calculation to illustrate the
potential return with and without incentive. The return realized by the Developer
is a result of the assumptions used in the creation of the operating pro forma,
therefore a number of steps must be performed to analyze the reasonableness of
the assumptions used.
The first step in analyzing the return to the Developer is to determine if the costs
presented are reasonable. If cost savings for the Developer’s share occur absent
any other changes, the Developer would realize a greater return than projected.
In the sensitivity analysis below we examine the impact of cost savings on the
projected rate of return without incentive.
The second step in calculating the return to the Developer is to determine if the
operating revenues and expenses are reasonable.
The Developer has projected existing base and percentage lease revenue
will increase from current levels at a rate of 3% annually as a result of
the redevelopment. Additionally, the Developer has projected the current
vacancy amount of 90,000 square feet will be leased over a 5 -year
period, with approximately 18,000 square feet leased each year at a net
lease-rate of $8.00 per square foot.
The Developer has not assumed any other vacancy factor.
The Developer has indicated that gross operating expenses will inflate
from current levels at a rate of 2% annually.
Outlot pad site sales total $1,200,000, based on the sale of the three pad
sites at a per pad rate of $400,000.
The Developer provided the management report prepared by the Mall’s operating
agent, which provided the source for the current operating revenue and expense
levels. In conversations with representatives of the Developer, it was indicated
that the per square foot rental ra te of $8.00 per square foot was a reasonable
assumption for the future lease-out of the 90,000 square feet of currently vacant
space. The occupancy of the vacant space accounts for approximately 34% of
the total operating revenue, upon stabilization. In the sensitivity analysis we
examine the impact of increased operating income on the projected rate of return
without incentive.
The third step in analyzing the return to the Developer is to determine if the
assumptions for a sale of the asset are reasonable. The return analysis to the
Developer should factor in a hypothetical sale of the asset at the end of ten years
Return Analysis 9
Jefferson City, Missouri. Capital Mall TIF Plan, “But For” Determination Report
of operations. A critical assumption when valuing the asset at the time of the
hypothetical sale is the capitalization rate. The available net operating income
divided by the capitalization rate results in the assumed fair market value of the
asset. The Developer has used a capitalization rate of 12.0% for the project to
calculate the hypothetical sale value. The Developer indicated their purchase of
the mall was based on a 12.0% cap rate, which they have carried over to their
assumption in regards to the hypothetical sale. Unlike more traditional real estate
developments there is not significant local market comparison data for older
enclosed mall structures. A 12.0% cap rate is at the higher end for current
national figures for regional mall facilities. For illustrative purposes we have
calculated an alternate rate of return analysis using a 10% cap rate, to illustrate
the potential impact of a revised cap rate assumption.
The Developer’s submitted pro forma was modified to include the IRR analysis
on an unleveraged basis. An unleveraged IRR calculation is performed in order
to compare the potential return to the Developer based on the Price Waterhouse
Cooper (PWC)/Korpacz Real Estate Investor Survey, Third Quarter 2013,
which provides a market comparison on which project feasibility can be judged.
Table F below shows the Developer’s base pro forma with the rate of ret urn with
and without incentive, on both a leveraged and unleveraged basis .
Table F
Base Developer
Pro Forma
12%
Cap Rate
Scenario
10%
Cap Rate
Scenario
Leveraged - Basis
Without Incentive 7.12% 8.76%
With Incentive 14.35% 16.36%
Unleveraged – Basis
Without Incentive 3.78% 5.13%
With Incentive 10.88% 12.22%
To evaluate the rate of return a project of this nature would require to be
considered “feasible” we consulted the Korpacz/Price Waterhouse Cooper Real
Estate Investor Survey prepared for the third quarter of 2013. This survey
provides a resource for comparing the Developer’s rate of return to a market
benchmark to help determine feasibility. According to the developers surveyed,
the typical unleveraged market return necessary for them to pursue a project of
this nature falls in a range from 5.50% to 12.00%; with an average return of
8.79%.
In order to answer the question “is the development likely to occur without public
incentive” we analyzed the without incentive scenarios, using the base developer
Return Analysis 10
Jefferson City, Missouri. Capital Mall TIF Plan, “But For” Determination Report
pro forma without incentive as the basis of the assumption. We performed a
sensitivity analysis in order to understand the magnitude at which project costs
would have to decrease, or conversely project revenues would have to increase,
for the project to be considered feasible. This analysis indicates how much
project assumptions would have to change for the project to be feasible without
incentive, using the Developer’s base 12% cap rate pro forma . For this
sensitivity analysis we are using the average market return from the Korpacz
Survey of 8.79% as our target for a “feasible” project.
To understand the impact of the project cost assumptions, we have performed a
cost sensitivity analysis to determine the rate at which costs wou ld have to be
reduced for the project to be feasible without incentive. Table G illustrates the
development would need to realize a 26% reduction in project costs in order to be
feasible without incentive. Given a 26% reduction in costs the project would
have a rate of return of 8.79% which falls into the reasonable range. Based on
our review of the project cost assumptions, it appears a reduction in project costs
of this significance is unlikely to occur.
Table G
Project Costs
Sensitivity
Reduction
in Project
Costs
Rate of Return
without incentive
26% 8.79%
To understand the impact of projected operating income we have performed a
sensitivity analysis to determine the rate at which operating income would have to
be increased for the project to be feasible without incentive. Table H illustrates
the development would need to realize a 35% increase in rental revenues in order
for the project to be feasible without incentive. Given a 35% increase in lease
revenues, the project would have a rate of return of 8.77% which falls into the
reasonable range. Based on our review of the operating revenue assumptions, it
appears an increase of this significance is unlikely to occur.
Table H
Operating
Revenue
Sensitivity
Increase
In Operating
Revenue
Rate of Return
without Incentive
35% 8.77%
As a final step in the sensitivity analysis, and to understand the impact of a
combined change in project costs and rental rates, we have performed a
sensitivity analysis to determine the rate at which these areas would have to
change for the project to be feasible without incentive. Table I illustrates the
development would need to realize both a 15% decrease in project costs and a
15% increase in operating revenues for the project to be feasible without
Return Analysis 11
Jefferson City, Missouri. Capital Mall TIF Plan, “But For” Determination Report
incentive. Given these changes in assumptions the project would have a rate of
return of 8.81%. However, given the magnitude of the changes , it appears they
are unlikely to occur.
Table I
Project
Cost &
Lease Rate
Sensitivity
Reduction
in Project
Costs
Increase
in Lease Rates
& Land Sales
Rate of Return
without
Incentive
15% 15% 8.81%
The three tables above (Tables G, H and I) indicate the magnitude at which
project assumptions would have to change for the project to have a feasible rate
of ret urn, which we believe lies at approximately 8.79% for the proposed project.
Absent changes of the magnitude outlined above, the project would not have a
sufficient return to draw market investment. Only by assuming either significant
increases in project revenues, decreases in project costs or a combined change of
the two does the return reach a feasible level without public incentive. However,
we project that changes of the magnitude outlined above are unlikely to be
realized, which indicates the proposed project would not likely be completed
through private enterprise alone.
“But For” Conclusion 12
Jefferson City, Missouri. Capital Mall TIF Plan, “But For” Determination Report
7. “But For” Conclusion
This TIF project involves the redevelopment of a blighted site. The Developer
will bear all the risk until project completion and permanent financing is in place,
and continued operating risk thereafter. This level of risk demands a positive
return with a range between 5.50% and 12.00% based on the Korpacz Survey.
A Blight Study prepared by Valbridge Property Advisors dated July 30, 2013
and an affidavit signed by the Developer dated August 5, 2013, state that the
redevelopment area is blighted and has not been subject to growth and
development through investment by private enterprise and would not reasonably
be anticipated to be developed without the adoption of tax increment financing.
Based upon the Blight Study, Developer affidavit, and upon our analysis, we
conclude that the proposed project would not occur on this site at this time
without a public incentive.