Loading...
HomeMy Public PortalAbout2013-10-18c-JeffersonCityButForReport 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 Springsted provides high quality, independent financial 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.