HomeMy Public PortalAbout2017-05-11 St Marys TIF Final Jefferson City MO But For
St. Mary’s Hospital Project
City of Jefferson, Missouri
But-For Determination Report
May 11, 2017
1 EXECUTIVE SUMMARY ....................................................................... 1
2 PURPOSE .......................................................................................... 3
3 THE PROJECT.................................................................................... 5
4 ASSISTANCE REQUEST .................................................................... 12
5 RETURN ANALYSIS .......................................................................... 14
6 CONCLUSIONS ................................................................................ 18
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
Executive Summary 1
City of Jefferson, Missouri. St. Mary’s Hospital Project: But for Determination
1. Executive Summary
The City of Jefferson has retained Springsted to review the proposed St. Mary’s
Hospital Tax Increment Financing Plan to determine if either of the proposed
development scenarios would reasonably be anticipated to be developed without
adoption of the requested financial assistance. The TIF plan contemplates two
potential redevelopment scenarios for the former St. Mary’s Hospital. The
Lincoln Project contemplates redevelopment of the site to include a satellite
location for Lincoln University in addition to office building space and stand-
alone retail pad buildings. The Commercial Project contemplates the project
without the classroom component and is based on the project being developed
to include office space and stand-alone retail pad buildings. The developer is
F&F Development, LLC, (the “Developer”).
The measurement index to determine the need for assistance is the return on
investment, termed the internal rate of return, (the “IRR”), as compared to
comparable projects in the current marketplace. Springsted reviewed project
costs, operating revenue and expense information and the requested assistance
revenues to determine each Project’s need for assistance. Springsted reviewed
ten-year cash flow projections provided by the Developer and tested the revenue
and cost assumptions prepared by the Developer. The testing compared the
Developer’s representations to industry benchmarks. We determined the
following:
For both Projects, the projected IRR without assistance to the Developer
falls below the current range expected within the marketplace and the
Developer’s own return requirement. Based on the projected level of
return without assistance, we conclude neither Project is likely to be
undertaken without public assistance.
Both development scenarios would have to realize either cost savings,
revenue increases or a combination of the two for the project to be
undertaken without public assistance.
The estimated rates of return for each Project with and without assistance are
illustrated below in Table A along with the rate at which assumptions would
have to change for either Project to be considered feasible without assistance.
Table A
Internal Rate of Return (IRR) – Return Analysis
Unleveraged Return Lincoln
Project
Commercial
Project
Return Without Assistance 3.61% 3.56%
Return With Assistance 8.22% 9.40%
Sensitivity Analysis (to Return Without Assistance)
Decreased Costs 21% Decrease 26% Decrease
Increased Project Revenue 45% Increase 46% Increase
Combined Cost Savings
& Increased Project Revenue
14% Decreased Costs
14% Increased Revenue
17% Decreased Costs
17% Increased Revenue
Executive Summary 2
City of Jefferson, Missouri. St. Mary’s Hospital Project: But for Determination
For purposes of performing our sensitivity analysis we have utilized the PwC
Real Estate Investor Survey which identifies the range of returns for a
development of this nature as: 6.00% to 13.00%, with an average return target
of 8.91%.
Purpose 3
City of Jefferson, Missouri. St. Mary’s Hospital Project: But for Determination
2. Purpose
The City of Jefferson has retained Springsted to review the proposed St. Mary’s
Hospital Tax Increment Financing Redevelopment Plan. The plan proposes the
redevelopment of the former St. Mary’s Hospital site, which consists of
approximately 9.8 acres located at the southwest corner of 50 Highway and
Bolivar. The redevelopment plan proposes various expansions to the historic
hospital building and neighboring facilities.
The Developer is proposing two potential redevelopment scenarios within the
Redevelopment Plan: the “Lincoln Project” and the “Commercial Project.”
The Lincoln Project is the Developer’s preferred redevelopment option and
proposes;
Development of a satellite location for Lincoln University consisting of
the renovation of the historic hospital building into a 135,350 square
foot higher education center,
Renovation of 75,000 square feet of office space,
Redevelopment of a 37,000 square foot medical office building, and
Development of the balance of the site into 21,000 building square feet
of commercial pad sites focused on restaurant and retail uses.
In total, the Lincoln Project consists of approximately 268,350 square feet of
newly constructed and redeveloped buildings.
The Commercial Project is an alternative development scenario proposed by the
Developer in the event that the Lincoln Project does not come to fruition. The
Commercial Project proposes;
Renovation of 75,000 square feet of office space,
Redevelopment of a 37,000 square foot medical office building, and
Development of the balance of the site into 30,200 building square feet
of commercial pad sites focused on restaurant and retail uses.
In total, the Commercial Project consists of approximately 142,200 square feet
of newly constructed and redeveloped buildings.
The Developer has indicated that the specific development scenario to be
undertaken will be determined based on the availability of state financing for
the Lincoln University component. It is anticipated that the state funding will
be considered during the 2017 legislative session. If the state financing is
secured, construction will commence on the Lincoln Project in the summer of
2017, with redevelopment of the St. Mary’s hospital building and the medical
office building occurring at that time. If state financing for the Lincoln
component is not obtained, commencement of the Commercial Project may
occur at any time. In the TIF revenue projections for both Project scenarios, it
Purpose 4
City of Jefferson, Missouri. St. Mary’s Hospital Project: But for Determination
is anticipated that there will be a 3-year construction period before the projects
are 100% assessed and on the tax rolls.
The City has requested this analysis to estimate each Project’s need for the
requested assistance, based on the cost and operating pro forma information
provided by the Developer. The analysis that follows examines whether either
of the proposed development scenarios would reasonably be anticipated to be
developed without the requested financial assistance.
The report that follows is pursuant to Missouri Statutes 99.800 et seq. relative to
a determination that the proposed development scenarios within the proposed
TIF Redevelopment Plan would not reasonably be anticipated to be developed
without the adoption of the Plan.
We have approached this determination based on the proposed plans regarding
development costs, outcomes, financing sources, and timing, to develop a
measure of the Developer’s expected return when compared to the amount of
risk. If the development 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. This
analysis is termed the internal rate of return. The final determination is based
on whether or not the potential return is reasonable without the requested
assistance, within the current marketplace and at the present time.
The Developer is requesting assistance in the following forms for both of the
Project scenarios, though the specific amount of assistance requested differs:
- Statutory TIF - One hundred percent of the incremental increase in ad
valorem property tax revenues (“PILOTS”) along with 50% of the
incremental increase in economic activity tax revenues (“EATS”) which
will be captured and re-directed to pay for new eligible reimbursable
redevelopment project costs incurred by the Developer.
- City Supplemental TIF Assistance – for the Lincoln Project, the
Developer is seeking the redirection of the entire portion of the City’s
uncaptured EATS revenue generated by the project, not including the
Parks Sales Tax. For the Commercial Project, the City Supplemental
TIF Assistance is reduced to half of the City’s uncaptured general sales
tax revenue generated by the project.
- Community Improvement District (CID) Sales Tax – The Developer is
proposing the creation of a 1% Community Improvement District Sales
Tax which will be applied to all sales within the Project Area. The CID
is anticipated to have a lifetime of forty years from commencement of
sales tax collection.
Project 5
City of Jefferson, Missouri. St. Mary’s Hospital Project: But for Determination
3. The Project
For each of the Projects, the Developer has prepared budgets which can be
broken down into the following categories; land acquisition, demolition costs,
site preparation/infrastructure, building construction costs, soft costs, and
contingency. For each of these cost categories, the Developer has identified the
pro-rata share of the combined TIF and City Supplemental TIF reimbursement
that could be applied to the cost category, based on the ratio of the net present
value (NPV) of the revenue streams to the total TIF eligible costs. The
Developer did not specifically cite the individual line-items for which CID
reimbursement would be sought. Since the Developer is seeking reimbursement
for the TIF and CID eligible expenses on an as incurred basis, they are also
seeking reimbursement for the interest cost incurred in the carrying of these
expenses prior to reimbursement at an estimated annual rate of 6%.
Table B – Lincoln Project
Costs Category Total Project
Cost
% of Total
Costs
Developer
Costs*
TIF/City
Supplemental TIF
Reimbursable
Costs**
40-Year CID
Reimbursable
Costs
Land Acquisition & Carry $1,250,000 2.80% $1,054,929 $195,071 -
Demolition Costs 2,154,651 4.83% 1,818,403 336,248 -
Site Preparation/Infrastructure 4,336,272 9.72% 3,659,567 676,705 -
Building Construction Costs 28,430,000 63.70% 23,933,305 4,436,695 -
Soft Costs 4,733,050 10.60% 3,994,425 738,625 -
Contingency 3,728,745 8.35% 3,146,849 581,896 -
Total Lincoln Project Costs $44,632,718 100% $37,667,478* $6,965,240 $834,722
Table C – Commercial Project
Costs Category Total Project
Cost
% of Total
Costs
Developer
Costs*
TIF/City
Supplemental TIF
Reimbursable
Costs**
40-Year CID
Reimbursable
Costs
Land Acquisition & Carry $1,250,000 4.04% $1,004,432 $245,568 -
Demolition Costs 2,668,666 8.64% 2,144,395 524,271 -
Site Preparation/Infrastructure 4,336,272 14.03% 3,484,393 851,879 -
Building Construction Costs 16,919,000 54.75% 13,595,190 3,323,810 -
Soft Costs 3,179,065 10.29% 2,554,524 624,541 -
Contingency 2,551,347 8.26% 2,050,124 501,223 -
Total Commercial Project Costs $30,904,350 100% $24,833,058 $6,071,292 $1,200,409
* The Developer Costs are prior to the application of the CID reimbursable expenses,
for which specific reimbursable line-items were not identified. The actual developer
cost will be the net amount after the CID reimbursement.
** The Developer did not identify the specific line-items for which they are seeking
TIF/Supplemental TIF reimbursement. The amounts shown represent the proportional
breakout for each eligible line-item on the basis of the ratio of TIF to total project costs.
Land Acquisition
Project 6
City of Jefferson, Missouri. St. Mary’s Hospital Project: But for Determination
The Developer’s cost for acquiring the redevelopment site was $1,000,000,
which occurred on December 16, 2015. The Developer documented this cost
assumption by providing the original purchase contract for the acquisition of the
site, along with corresponding amendments to the contract. The development
site is approximately 10.79 acres resulting in a per acre cost of $92,678. In
addition to this cost, the developer has allocated $250,000 in carrying expenses
to the total land acquisition category. This equates to 2.80% of the total cost for
the Lincoln Project and 4.04% for the Commercial Project.
Hard Costs
Table D – Lincoln Project
Hard Costs Total Costs
% of
Total
Costs
Developer
Costs
TIF/City
Supplemental
TIF
Reimbursabl
e Costs
Asbestos Removal $1,400,000 3.15% $1,183,385 $216,615
Garage Demolition 150,000 0.34% 126,791 23,209
Demolition of Walk Bridge 32,000 0.07% 27,049 4,951
Demolition of East Building 122,248 0.28% 103,333 18,915
Demolition Between Buildings 195,918 0.44% 165,605 30,313
Medical Office Building Partial Demo 55,500 0.13% 46,913 8,587
Historic Building Partial Demolition 63,000 0.14% 53,252 9,748
Partial Demolition of Central Building 135,985 0.31% 114,945 21,040
Site Utilities 742,000 1.67% 627,194 114,806
Garage Repairs 1,000,000 2.25% 845,275 154,725
Excavation 888,600 2.00% 751,112 137,488
Asphalt/Pavement 565,302 1.27% 477,836 87,466
Landscaping 325,100 0.73% 274,799 50,301
Curb/Gutter 190,180 0.43% 160,754 29,426
Sidewalks 85,090 0.19% 71,924 13,166
Retaining Walls 540,000 1.22% 456,449 83,551
Lincoln University Site 13,535,000 30.50% 11,440,800 2,094,200
Medical Office Building 2,775,000 6.25% 2,345,639 429,361
Historic Building Remodel 7,500,000 16.90% 6,339,561 1,160,436
Building 4A 1,760,000 3.97% 1,487,684 272,316
Building 4B 990,000 2.23% 836,822 153,178
Building 5 1,320,000 2.97% 1,115,763 204,237
Building 7 550,000 1.24% 464,901 85,099
Total Hard Costs $34,920,923 78.68% $29,517,791 $5,403,132
Project 7
City of Jefferson, Missouri. St. Mary’s Hospital Project: But for Determination
Table E – Commercial Project
Hard Costs Total Costs
% of
Total
Costs
Developer
Costs
TIF/City
Supplementar
y TIF
Reimbursable
Costs
Asbestos Removal $1,400,000 3.15% $1,136,639 $263,361
Garage Demolition 150,000 0.34% 121,783 28,217
Demolition of Walk Bridge 32,000 0.07% 25,980 6,020
Demolition of East Building 122,248 0.28% 99,251 22,997
Demolition Between Buildings 195,918 0.44% 159,063 36,855
Medical Office Building Partial Demo 55,500 0.13% 45,060 10,440
Historic Building Partial Demolition 63,000 0.14% 51,149 11,851
Total Demolition of Central Building 650,000 0.31% 527,725 122,275
Site Utilities 742,000 2.42% 602,419 139,581
Garage Repairs 1,000,000 3.26% 811,885 188,115
Excavation 888,600 2.90% 721,441 167,159
Asphalt/Pavement 565,302 1.84% 458,960 106,342
Landscaping 325,100 1.06% 263,944 61,156
Curb/Gutter 190,180 0.62% 154,404 35,776
Sidewalks 85,090 0.28% 69,083 16,007
Retaining Walls 540,000 1.76% 438,418 101,582
Medical Office Building 2,775,000 9.05% 2,252,980 522,020
Historic Building Remodel 7,500,000 24.47% 6,089,136 1,410,864
Building 2 1,320,000 4.31% 1,071,688 248,312
Building 3 704,000 2.30% 571,567 132,433
Building 4A 1,760,000 5.74% 1,428,917 331,083
Building 4B 990,000 3.23% 803,766 186,234
Building 5 1,320,000 4.31% 1,071,688 248,312
Building 7 550,000 1.79% 446,537 103,463
Total Hard Costs $23,923,938 78.04% $19,423,481 $4,500,457
Utilizing the information provided by the Developer, we have grouped costs
associated with demolition, site preparation/infrastructure and building
construction costs under the hard costs heading. The total hard costs for the
Lincoln Project are $34,920,923; which equates to 78.68% of the total costs.
The total hard costs for the Commercial Project are $23,923,938; which equates
to 78.04%.
The total costs associated with demolition range from $2,154,651 for the
Lincoln Project to $2,668,666 for the Commercial Project. The Commercial
Project has a larger cost estimate due to the total demolition of the central
hospital building, as opposed to just a partial demolition and reuse as proposed
in the Lincoln Project.
The costs under the heading of Site Preparation/Infrastructure total $4,336,272
for both scenarios.
Project 8
City of Jefferson, Missouri. St. Mary’s Hospital Project: But for Determination
The largest of the hard cost categories are for building construction costs related
to the redevelopment of existing buildings and the constructions of new retail
and restaurant buildings. The construction cost assumptions for each building
are illustrated below in Table F, which represents a blending of both
development scenarios.
Table F
Building Construction Costs Square
Footage
Cost
Per
Square Foot
Total
Costs
Lincoln University Site (Lincoln Scenario) 135,350 $100 13,535,000
Medical Office Building Remodel (Both Scenarios) 37,000 $75.00 2,775,000
Historic Building Remodel (Both Scenarios) 75,000 $100 7,500,000
Building 2 (Commercial Scenario) 6,000 $220 1,320,000
Building 3 (Commercial Scenario) 3,200 $220 704,000
Building 4A (Both Scenarios) 8,000 $220 1,760,000
Building 4B (Both Scenarios) 4,500 $220 990,000
Building 5 (Both Scenarios) 6,000 $220 1,320,000
Building 7 (Both Scenarios) 2,500 $220 550,000
The building construction cost line-items can be broken down into three
categories, historical redevelopment, medical office building redevelopment,
and new retail/restaurant building construction.
The anticipated cost of remodeling the Medical Office Building is the lowest of
the vertical building costs (on a per square foot basis) at an anticipated $75 per
square foot. The next lowest category is the historical redevelopment cost
assumption of $100 per square foot, which is the basis for the estimate of
redeveloping the existing central building for Lincoln University and
redevelopment of the 75,000 square foot office building. The Developer will
also be constructing four to six new pad site buildings for retail and restaurant
uses, which they have estimated will cost approximately $220 per square foot.
The Developer is proposing the redevelopment of an existing historic building,
which will require substantial hard-cost investment. The redevelopment of this
portion of the Lincoln Project must adhere to historical rehabilitation standards
necessary to receive the historic tax credits the Developer is seeking. Given the
unique nature of this portion of the Project, it is not possible to provide third-
party cost estimates to provide as a comparison without engaging independent
architects and engineers.
Depending on the Project, the Developer is anticipating incurring costs related
to remodeling of between 112,000 square feet and 247,350 square feet. The
Developer has estimated this expense as ranging between $75 and $100 per
square foot. To provide a comparison, albeit imperfect, we compared the cost
estimates to the RSMeans Square Foot Cost Estimator for estimated
construction costs for a new apartment building in the Jefferson City
metropolitan area. The RSMeans data provides a range of cost estimates for the
construction of vertical building improvements. The RSMeans estimate range
Project 9
City of Jefferson, Missouri. St. Mary’s Hospital Project: But for Determination
for this type of building ranges from $138.26 to $167.78. The Developer’s cost
assumption of $100 per square foot is below the low-end of this range by 28%.
It should be noted also that, in both Projects, the amount of Historic Tax Credits
available to the Developer are based on the amount of eligible expenditures
incurred by the Developer. Therefore, if the Developer were to realize actual
remodeling project costs lower than projected, this would likely lead to a
decrease in the value provided by the tax credits, thus partially offsetting the
beneficial impact on the Developer’s return due to lower costs.
The Developer is also anticipating constructing between 21,000 square feet and
30,200 square feet of commercial pad buildings, split between 4 and 6 pads
depending on the Project. These pad sites are anticipated to be utilized for retail
and restaurant uses. The Developer has assumed an average per square foot cost
of $220 for development of these buildings.
In comparison, the RSMeans estimate for sit-down restaurants ranges from
$169.68 to $200.68, with an average of $186.45. The range for fast-food
restaurants is $169.60 to $195.64 with an average of $183.26. Additionally, we
determined the per square foot estimate for retail buildings is $97.04 to $125.79,
with an average of $116.20. Based on these comparisons, the Developer’s
estimate of $220 per square foot may be high. When available, it would be
useful to understand the specific end users and finish levels in order to draw a
conclusion.
The development of the new retail and restaurant buildings in the Commercial
Project totals $6,644,000, which equates to 21.50% of the total Commercial
Project costs. For comparison, if the specific vertical improvement line-item
were to be decreased by approximately 15%, which is roughly the difference
between the Developer’s cost estimate of $220 and the RSMeans restaurant
average of $186.45; the total cost for the commercial Project would only
decrease by 8%. For the Lincoln Project, the new pad building cost estimate is
$4,620,000, which is 10.35% of the total Project cost. Reducing the cost
estimate by 15% would decrease total costs for the Lincoln Project by only 2%.
Soft Costs
Tables G and H below provide the breakout of the individual costs which we
have categorized as soft costs for each Project scenario:
Project 10
City of Jefferson, Missouri. St. Mary’s Hospital Project: But for Determination
Table G – Lincoln Project
Table H – Commercial Project
The individual line-items we have categorized as soft costs total $4,733,050 for
the Lincoln Scenario which equates to 10.60% of the total Project costs. For the
Commercial Project, soft costs total $3,179,065 and equate to approximately
10.29% of the total costs for that Project.
The largest line-item under the soft cost heading is the Developer Fee line item.
For both Projects, this fee is based on 6% of the building construction cost total.
The next largest line-item is the architecture and engineering cost, which is
based on 3.5% of the building construction cost total for each Project.
The Developer also estimated the following line-items as each being based on
1% of the total building construction cost; closing costs/financing fees, interest
Soft Costs Total Costs
% of
Total
Costs
Developer
Costs
TIF/City
Supplementar
y TIF
Reimbursable
Costs
Architecture & Engineering $995,050 2.23% $839,766 155,284
Legal/Accounting 450,000 1.01% 379,774 70,226
Closing Costs/Financing Fees 284,300 0.64% 239,933 44,367
Interest Reserve 284,300 0.64% 239,933 44,367
Construction Management Fee 284,300 0.64% 239,933 44,367
Developer Fee 1,705,800 3.82% 1,439,598 266,202
Overhead & Reimbursables 284,300 0.64% 239,933 44,367
Testing, Surveys, and Studies 100,000 0.22% 84,394 15,606
Permits & Fees 125,000 0.28% 105,493 19,507
Real Estate Taxes 120,000 0.27% 101,273 18,727
Construction Period Insurance 100,000 0.22% 84,394 15,606
Lincoln Project Soft Costs $4,733,050 10.60% $3,994,425 $738,625
Soft Costs Total Costs
% of
Total
Costs
Developer
Costs
TIF/Supplem.
Reimbursabl
e Costs
Architecture & Engineering $592,165 1.92% $475,832 $116,333
Legal/Accounting 450,000 1.46% 361,596 88,404
Closing Costs/Financing Fees 169,190 0.55% 136,952 33,238
Interest Reserve 169,190 0.55% 136,952 33,238
Construction Management Fee 169,190 0.55% 136,952 33,238
Developer Fee 1,015,140 3.28% 815,711 199,429
Overhead & Reimbursables 169,190 0.55% 135,952 33,238
Testing, Surveys, and Studies 100,000 0.32% 80,355 19,645
Permits & Fees 125,000 0.40% 100,443 24,557
Real Estate Taxes 120,000 0.39% 96,425 23,575
Construction Period Insurance 100,000 0.32% 80,355 19,645
Lincoln Project Soft Costs $3,179,065 10.29% $2,554,524 $624,541
Project 11
City of Jefferson, Missouri. St. Mary’s Hospital Project: But for Determination
reserve, construction management fee and overhead & reimbursables.
Cumulatively these line-items equate to a cost estimate based on 4% of the total
building construction cost.
The remaining line-items are nominal amounts, cumulatively equating to
slightly more than 1% of the total Project costs.
Contingency
The total contingency amount for the Lincoln Project is $3,728,745, while for
the Commercial Project it is $2,551,347. In both scenarios the contingency
amount is broken out into hard and soft cost categories. The hard cost
contingency amount is calculated based on 10% of the total building
construction costs and site preparation/infrastructure costs. The soft cost
contingency amount is based on 5% of the total soft cost category. These are
reasonable assumptions for the calculation of contingencies.
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
resulting from a decrease in project costs.
Assistance Request 12
City of Jefferson, Missouri. St. Mary’s Hospital Project: But for Determination
4. Assistance Request
The Developer is requesting assistance from the following sources:
-Statutory TIF – One hundred percent of the incremental increase in ad
valorem property tax revenues (“PILOTS”) along with 50% of the incremental
increase in economic activity tax revenues (“EATS”) which will be captured
and re-directed to pay for eligible reimbursable project costs incurred by the
Developer.
-City Supplemental Tax Redirection – For the Commercial Project, the
Developer is seeking redirection of 50% of the increased EATS generated by
the City’s general sales tax. For the Lincoln Project, the Developer is seeking
redirection of 100% of the increased EATS generated by all of the City’s sales
taxes, excluding the 0.25% parks sales tax.
-Community Improvement District (CID) Sales Tax – Creation of a 1%
Community Improvement District Sales Tax which will be applied to all
properties within the CID Area. The CID is anticipated to have a term of forty
years from commencement of the collection of the sales tax.
The Developer is requesting the above described sources of revenue be used to
provide assistance on a pay-as-you-go basis. The anticipated funding capacity
of the various revenue streams was estimated based on the Net Present Value
(NPV) of each revenue stream assuming a 6% private loan interest rate. In the
following table we illustrate the funding capacity of each source of revenue for
each of the development scenarios.
Table I
In the return analysis section we will illustrate the impact on the projected rate
of return with and without the requested forms of assistance.
Table J provides the anticipated sources that will be utilized to fund the
redevelopment project costs for each Project.
Form of Assistance:
Lincoln Project
Funding Capacity
Commercial Project
Funding Capacity
TIF – PILOTS & EATS Revenue $6,264,589 $5,399,557
City Supplemental Tax Redirection $700,651 $671,735
CID (40-Years) $834,722 $1,200,409
Total Assistance Request $7,799,962 $7,271,701
Return Analysis 13
City of Jefferson, Missouri. St. Mary’s Hospital Project: But for Determination
Table J
Sources: Lincoln
Project
Commercial
Project
Private Debt & Equity $21,548,362 $18,348,255
New Market Tax Credits 753,144 753,144
Federal Historic Tax Credits 1,125,000 1,125,000
State Historic Tax Credits 1,406,250 1,406,250
Brownfield Credits 2,000,000 2,000,000
TIF – NPV 6,264,589 5,399,557
City Supplemental TIF – NPV 700,651 671,735
CID – NPV – 40-year Term 834,722 1,200,409
State – Lincoln Contribution 10,000,000 N/A
Total Sources $44,632,718 $30,904,350
Return Analysis 14
City of Jefferson, Missouri. St. Mary’s Hospital Project: But for Determination
5. Return Analysis
Utilizing the operating pro forma prepared by the Developer, we evaluated the
need for assistance for the proposed development by comparing the potential
return with and without assistance. The Developer provided a 10-year operating
pro forma for the development based on a two-year build-out and three-year
lease up period and operating revenue and expense assumptions for each of the
development scenarios The Developer’s pro forma calculated a leveraged
internal rate of return (IRR) after the 10-years of the pro forma. Utilizing the
baseline pro forma provided by the Developer, we calculated the return on an
unleveraged basis to estimate the potential return with and without the requested
forms of assistance. 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.
Step One – Evaluate Project Costs:
The first step in analyzing the return to the Developer is to determine if the costs
presented are reasonable. If the Developer experiences cost savings absent any
other changes, the Developer would realize a greater return than projected. The
reasonableness of the Developer’s cost assumptions is detailed in the project
cost section of the Report. In the sensitivity analysis, we address the rate at
which project costs would need to change for the project to be feasible without
the requested assistance.
Step Two – Evaluate Operating Pro Forma Assumptions:
The second step in calculating the return to the Developer is to determine if the
operating revenues and expenses of the proposed development are reasonable.
The Developer’s pro forma identified proposed office lease rates of $13 to $15
per square foot. For the individual pad buildings the Developer estimated pad
lease rates of $20 to $25 per building square foot. For the Lincoln School
scenario the Developer assumed a $3.50 per square foot lease rate assumption
for the 135,250 square feet of higher education space.
On the operating expense side, the Developer assumed a 10% allowance for
operating overhead expenses, 5% for a vacancy factor and 5% for capital
reserves. The Developer is assuming both scenarios are tenanted over a 3 year
period.
Based on a market review, we found the Developer’s lease rate and operating
assumptions to be reasonable.
Step Three – Evaluate Hypothetical Sale Assumptions:
The third step in analyzing the return to the Developer is to determine if the
assumptions for the hypothetical sale of the asset are reasonable. The
calculation of an internal rate of return requires the assumption of a hypothetical
sale of the asset in the final year of the operating pro forma. The inclusion of
Return Analysis 15
City of Jefferson, Missouri. St. Mary’s Hospital Project: But for Determination
this hypothetical sale is used purely for purposes of evaluating the return on the
Developer’s investment. The determination of the potential market value of the
project, through a hypothetical sale, is necessary as it allows for the inclusion of
the value of the asset into the rate of return calculation. The calculation of an
IRR without the hypothetical sale would result in an understated return. The
use of a hypothetical sale assumption is not indicative of the Developer’s
intention to sell the development in the final year.
The 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 8.00% for the project to calculate the
hypothetical sale value. In reviewing historical capitalization rate trends for
office developments, we feel that 8.00% is a reasonable assumption.
Developer – Baseline Unleveraged Return Analysis:
Table K shows the calculation for the baseline unleveraged IRR for both the
with and without assistance scenarios. It should be noted that the unleveraged
return analysis for the Lincoln Project includes the Developer receiving the state
contribution in the without assistance scenario. This was done to illustrate the
specific impact on the return of just the requested TIF/CID assistance, and
resulted in a higher return than the Developer’s without assistance pro forma.
Table K
Springsted Unleveraged IRR
Pro Forma
Lincoln
Project
IRR
Commercial
Project
IRR
Without Assistance 3.61% 3.56%
With Assistance 8.22% 9.40%
Market Return Benchmark:
To determine the unleveraged internal rate of return a standalone un-incented
project of this nature would require to be considered “feasible,” we consulted
the PwC Real Estate Investor Survey, First Quarter 2017. This survey provides
a resource to help determine feasibility of the project without incentives.
According to the developers surveyed, the typical unleveraged market return
necessary for them to pursue a development of this nature falls in a range from
6.00% to 13.00%; with an average return of 8.91%.
Sensitivity Analysis
In order to answer the question “is the development likely to occur without
public assistance,” we analyzed the without incentive pro forma for each of the
proposed development scenarios. A sensitivity analysis is performed 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
Return Analysis 16
City of Jefferson, Missouri. St. Mary’s Hospital Project: But for Determination
considered feasible. For this sensitivity analysis we are using the PwC Investor
Survey average return of 8.91% as our benchmark.
To understand the impact of the project cost assumptions, we performed a cost
sensitivity analysis to determine the rate at which project costs would have to
decrease for the projected un-assisted rate of return to be in excess of our
feasibility benchmark. Table L illustrates that the Developer would need to
realize a 21% project cost savings for the Lincoln Project to be feasible without
assistance and a 26% cost savings for the Commercial Project to be feasible
without assistance.
Table L
Project Costs
Sensitivity
Reduction
in Project
Costs
Rate of Return
without assistance
Lincoln 21% 9.21%
Commercial 26% 8.98%
To understand the impact of increased revenues, we performed a sensitivity
analysis to determine the rate at which project revenues would have to increase
for the projected rate of return to be in excess of our feasibility benchmark
without assistance. Table M illustrates that the Developer would need to realize
a 45% increase in project revenues for the Lincoln Project to be feasible without
assistance and a 46% increase in revenues for the Commercial Project to be
feasible without assistance.
Table M
Project
Revenue
Sensitivity
Increase
in Project
Revenues
Rate of Return
without assistance
Lincoln 45% 8.91%
Commercial 46% 8.95%
As a final step in the sensitivity analysis, and to understand the impact of a
combined change in project costs and project revenues, we performed a
sensitivity analysis to determine the rate at which these areas would have to
change for the projected un-assisted rate of return to be in excess of our
feasibility benchmark. Table N illustrates that the Developer would need to
realize a combined 14% decrease in costs and a 14% increase in revenues for
the Lincoln Project to be feasible without assistance. The table also illustrates
that the project would need to realize a combined 17% decrease in costs and
17% increase in revenues for the Commercial Project to be feasible without
assistance.
Return Analysis 17
City of Jefferson, Missouri. St. Mary’s Hospital Project: But for Determination
Table N
Combined
Sensitivity
Reduction
in Project
Costs
Increase
in Project
Revenues
Rate of Return
without
assistance
Lincoln 14% 14% 8.95%
Commercial 17% 17% 9.11%
The three tables above (Tables L, M, and N) indicate the magnitude at which
project assumptions would have to change for either scenario to realize a rate of
return in excess of the 8.91% feasibility benchmark. Absent changes of the
magnitude outlined above, neither version of the project would generate a
sufficient return to draw market investment. Only by assuming either increases
in project revenues, decreases in project costs, or a combination of the two do
the returns increase to a feasible level without public assistance. Based on our
review of project costs and operating assumptions, changes of the magnitude
outlined above are unlikely to be realized, which indicates that the proposed
scenarios would not likely be completed through private enterprise alone.
Conclusions 18
City of Jefferson, Missouri. St. Mary’s Hospital Project: But for Determination
6. Conclusions
The proposed development scenarios contemplate the redevelopment of the
existing hospital site and the conversion of the property into office and retail
uses. Additionally, the Lincoln Project contemplates the redevelopment of a
portion of the site into university classroom space. In either scenario, 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 comparable national market range of 6.00% to
13.00%, with an average of 8.91% as indicated in the PwC Real Estate Investor
Survey.
As detailed above, the projected IRR to the Developer for either scenario
without assistance, falls outside of the low-end of the range expected within the
marketplace and significantly below the average return used as our feasibility
benchmark. In comparison, the return with assistance for both scenarios is
consistent with the average return used in our analysis.
A Blight Study prepared by Valbridge Property Advisors dated April 11, 2016
and an affidavit signed by the Developer dated June 22, 2016 state that the
redevelopment area is a blighted area 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,
Springsted concludes that the proposed Project, without assistance, would not
likely be undertaken at this time without the requested assistance