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HomeMy WebLinkAbout07.18.05 Work Session Minutes CITY COUNCIL WORKSHOP VERMILLION RIVER CROSSINGS DEVELOPMENT CONTRACT MINUTES July 18, 2005 1. CALL TO ORDER Mayor Soderberg called the meeting to order at 5 :00 p.m. Members Present: Soderberg, Fogarty, McKnight, Pritzlaff, Wilson Also Present: Joel Jamnik, City Attorney; David Urbia, City Administrator; Robin Roland, Finance Director; Kevin Carroll, Community Development Director; Dan Siebenaler, Police Chief; Randy Distad, Parks and Recreation Director; Lee Mann, Director of Public Works/City Engineer; Lisa Shadick, Administrative Services Director; Brenda Wendlandt, Human Resources Director; Cynthia Muller, Executive Assistant Audience: Dick Allendorf, Bob Pittner, Sid Inman 2. APPROVE AGENDA MOTION by Wilson, second by McKnight to approve the agenda. APIF, MOTION CARRIED. 3. DISCUSS VERMILLION RIVER CROSSINGS DEVELOPMENT CONTRACT City Administrator Urbia reviewed the contingencies for the final plat. They are as follows: 1. The planner shall approve the landscape plan along with design details for the 4 site amenity areas required in the Spruce Street Design Standards before any permits are issued. 2. The satisfaction of any engineering requirements including construction plans for grading, storm water and utilities. 3. The satisfaction of any Park and Recreation Advisory Commission comments concerning trails. 4. Execution of a Development Contract between the Developer and the City of Farmington and submission of security, payment of all fees and costs and submission of all other documents required under the Development Contract. Parks and Recreation Director Distad stated the trails have been worked out as far as location. At the last Park and Rec Commission meeting the developer made a request to give full credit for park dedication based on gas easement and wetlands that would be deeded to the City. The Commission has decided to give them credit for the town square which is .7 acres and also give credit for the 10ft. wide trail for the linear distance. Staff will compute this and determine whether all ofthe park dedication requirements have been satisfied. City Administrator Urbia stated Mr. Allendorf and Mr. Pittner were concerned about the timing for the Development Contract. Staff is planning to bring the Development Contract to Council on August 1,2005. City Engineer Mann stated the issue is whether staff has all the information needed to complete it and the time frame to go back and forth with the details. Staffwill try to provide the developer with a draft. City Administrator Urbia asked if there was an update on the landscape plan. Community Development Director Carroll was not sure if City Planner Smick has had any interaction with anyone in the last few days. The developer will work with her directly. City Council Workshop July 18, 2005 Page 2 City Administrator Urbia stated the main issue with the development contract is the abatement issue. There has not been any tax increment considered in the City for quite some time and not during the tenure of any of the Councilmembers. Finance Director Roland explained her understanding of abatement and what would be proposed for this project. Mr. Allendorf and Mr. Pittner provided staff with a cash flow analysis of their project. This analysis has been reviewed by the developer and Mr. Sid Inman of Ehlers and Associates. In Minnesota and as part of the City's business subsidy policy, staff must have the developer prove that for any assistance to be given to them from the City that they have a need or a but for situation that would require the City to assist them for their project to go forward. The issue has always been the Spruce Street extension and bridge project which the City will receive grant funding for, but which the total feasibility study shows a cost of$3 million. Staff provided Council with an analysis of how the cost breaks out. Under the current situation, staff proposed that the project be done in 2006 as a 429 project, meaning it would be assessed back to the development based on the amount of developable acres and the total cost less the Met Council grant. This is consistent with the way staff handles all developers in the City, both residential and commercial. Ifit is a new improvement, the City assesses 100% of the cost against the benefiting properties. The budget for the feasibility study is $3,046,000 less the Met Council grant of $955,000 and the balance ofthe cost of$2,091,000 would be per developable acre, an assessment of$48,617. There are five lots currently on the final plat. Each lot would be assessed to cover the Spruce Street extension and bridge project. Abatement is the assessment that would be spread on the properties over a period of time and the taxes and assessments would be paid as with any property. If a major national corporation purchased or leased one of the lots and built on it, the assessments and taxes would be paid on a semi-annual basis. The assessments would come to the City and be used to pay the debt service, but ifthe Council agrees to abatement the amount paid in taxes up to whatever point the Council decides will be rebated to the developer. Abatement can run up to 20 years, however if you choose to abate taxes over 10 years, you have to ask the county and the school district if they want to participate. The City would issue a 429 improvement bond to pay for the project and the debt service would be paid by the assessments that were paid. The lots would be assessed and the owner of the lots would pay the assessments with the property taxes annually. The City would pay back the abated taxes up to the amount ofthe assessment in that particular year. If the property owner does not pay the assessment or the taxes the City would be required to cover the cost of the debt service. This is the risk the City is taking. However, there would not be any abated taxes to pay back to the developer. Mr. Sid Inman stated the county or school district would have to deny the abatement to go over 10 years. This would be done through a letter, and if they say no, the county has to pass a resolution and then you can go up to 20 years. There are no qualified costs like there are in tax increment. You can spend the money any way you want to. You can do the abatement for any number of years. You can match the timing of the development. A public hearing must be held with 10 days notice and it is subject to business subsidy law and the developer will have to provide a guarantee of jobs. Councilmember Pritzlaff asked if this would be for 11 years or stay under 10 years. Finance Director Roland replied that is up to the Council. In the normal situation we have a 429 project and we have taxes and you collect the money on the assessments to pay for the bonds and collect the taxes. In a situation where you abate the taxes you are paying back the developer the amount, so you are not getting those tax dollars into your City Council Workshop July 18, 2005 Page 3 tax base because you are choosing to use those tax dollars to pay for the 429 project, the road and the bridge project. Councilmember McKnight asked if we levy back the abated amount. Mr. Inman replied you have to levy it back, but you cannot levy over and above. Councilmember McKnight stated we are going to be short X from the levy because of giving back the abated amount. Can we increase the levy by X. Mr. Inman stated you can, but it is not related to this. Whatever your levy limits are you can do that. You can also abate abates. You could abate every piece of property in the City. So part of this discussion should be a policy decision that he would recommend that the City never abates the existing taxes because then you will have a reduction. Council only has to make one finding and that is that Council believes the benefit of abating the taxes exceeds the cost and in this case you would be getting public improvements that everyone in the City would use so it is fairly easy to make that finding in this case. Finance Director Roland stated so in a year without levy limits we could levy whatever we chose to. If we had levy limits it would not go above and beyond that. Councilmember McKnight stated if we go through the budget process and the levy will be $1 million, that is what we need to pay the bills for the year, but we abated $50,000 for this project. His question is can we change the levy to $1,050,000 so we can in the end collect $1 million if everyone pays their taxes so we would have all the money we needed for the year. Councilmember Wilson stated in other words make an assumption this project will have cost to it that we will have to pay for. Councilmember McKnight replied the $50,000 potential abatement which we would collect and give it right back. If we did not levy $1,050,000 we would only have $950,000 to pay our $1 million in bills. Mr. Inman stated another alternative, but he is not suggesting this, is we do have cities that abate any or all of the annual amount. So you could run it for 20 years and abate 40% a year and keep the 60%. The abatement term is longer, but you do get some general fund taxes. In addition, none of the estimates include market value inflation. Based on your history that is 11 years, but it would probably be done a lot sooner because we could set the resolution to abate any increase in market value that the assessor puts on. Councilmember Pritzlaff clarified the $8,258 is per year. Finance Director Roland replied that is the assumption at this point. That would go up every year as the market value on the property would go up and the taxes. The overall growth in the tax base has been 15%-25% over the last number of years. The total build out or total cash flow gave Mr. Inman enough documentation and some assumptions were made about the size and variety of different commercial buildings that would be built and their value, so the entire buildout ofthe project in order to repay the full $2 million of the bond would take a market valuation of $39 million over a period of 12 years to pay back the entire amount. Councilmember Pritzlaff asked we are out of this tax money that we are abating so does that go back to the developer and the City would never recoup that. Finance Director Roland replied no, after the assessments are paid those tax dollars would not be abated and would come back onto the tax roles. Mr. Inman stated normally they would issue an abatement revenue note to the developer or land owner. If the City wants to get the note paid as fast as possible, then they would pledge 100% of the taxes. It could be 11, 8, or 7 years. Then the note goes away and the agreement is designed so the following year those taxes come back onto the tax role and you are done with that. Councilmember Pritzlaff asked what happened to the money we gave to the developer. City Engineer Mann replied those taxes are going to pay for the road. Mr. Inman stated they are suggesting the 429 is to ensure that if taxes do not get paid, they have a lien against the City Council Workshop July 18, 2005 Page 4 property so the taxpayers eventually would get paid back if they have to pay some. This is to give the City protection in case something happens in future phases and the taxes do not get paid. Councilmember Pritzlaff asked if this is the only phase this will have to be done on for this project. Finance Director Roland replied no, it will have to be done on all phases ofthe project. For the developer or property owners to recoup the full effect of their special assessments we would need a $39 million market tax base which would be full buildout of the project and that would repay the $2 million over a period of 12.5 years. There is limited risk to the City in this case because the developer or property owner is still responsible for paying the assessments on the property. They are also responsible for paying the taxes and once they pay the taxes and the assessments then they would get the amount of the assessment back. Councilmember Wilson stated there is not the benefit ofthis project being here for a period oftime. Finance Director Roland replied correct. The question is in 5-10 years if the market value increases on the properties and we were able to pay back the developer faster than the $8,000 a year we could get the property back on the tax roles faster. Community Development Director Carroll stated the tax benefits are not the only benefit that will come from the project. Because of the pivotal position of this development it is important to get it started sooner rather than later. He felt this outweighs the loss oftax revenue. Councilmember Wilson asked how common this strategy is. Mr. Inman stated this is the only tool the City has other than a grant, which you are already using. Councilmember Fogarty stated because it goes out as a 429 it does count against the City's bonding capacity. Finance Director Roland replied a 429 does not count against the debt limit because we do not have to levy to make those bond payments. They are asking for abatement on the full $2 million. The City is not asking anything of them that the City does not ask of other developers. Other developers put in City roads which are turned over to the City or they can ask the City to build those roads for them. The City determined as part of the Master Plan for this area that this particular road as a connection to the downtown was necessary and that it would provide a second access to the development. As such the costs for this particular proj ect should be assessed back to the benefiting properties. The developer has indicated they cannot, without some help, finance the improvements. Finance Director Roland stated this is the City's first abatement. TIP has been the tool of choice up until the abuses by other cities caused there to be more stringent rules. TIP is different from abatement because TIP is not only the City's portion it is the school district, the county and the state portion. Councilmember Pritzlaff noted staff said this is similar to other developments, does that mean residential developments too. Finance Director Roland replied commercial/industrial is different because this is one of the amenities that Council has identified as something they want in the City. With residential development, they build their own roads at their own cost. In this case because of the grant funds and because the City wants the road built, we would build it. A number of residential developers would rather build City roads themselves, because they feel they can get it done cheaper than the City and they can then include the price in the cost of the lots. There are a number of internal roads in Vermillion Crossings that the developer will build themselves. Councilmember Pritzlaff asked why we would not get a request for halfthe project rather than the full project. Finance Director Roland stated because the cash flow for the entire City Council Workshop July 18, 2005 Page 5 project does not support repayment of the $2 million in assessments because the developers do not feel they can charge enough for lease rental or in purchase price for the lots in order to cover the special assessments outright. Councilmember Wilson asked what is causing those factors. Is it that we are not at a point to fully support this type of development or is it general market forces? Mr. Inman replied the problem with commercial development is their vision of how fast the volume of a product will move in a location at what cost. The numbers indicate this is what is needed to jump start the market. Mr. Allendorf stated the proforma assumed very high lease rates. They assume a market rate based upon Lakeville and Apple Valley. The fact is, they have 61 acres and 38 that are developable and we have Spruce Street that we do not need. It does not do anything for the project. It may be very good as far as the Spruce Street development connecting with the downtown. If you took the 38 acres and developed it without Spruce Street it is a market project that would not need any help and they would not be here asking for help. Once you include the $2 million assessment for Spruce Street it makes the price of the land so high that they cannot bear it. They cannot charge any more for lease rates and expect to lease it. Councilmember Pritzlaff asked if we would be better to bond for the bridge or is more than the cost of the bridge the problem. Mr. Allendorfreplied the cost of$2 million is the problem. Councilmember Pritzlaff asked if we could just bond for that. City Administrator Urbia stated that includes the bridge and the road to the town square. Councilmember Pritzlaff stated you could get away from the abatement and just do a bond for a bridge and we are in it for $2 million. Councilmember Wilson stated that would bump against our level among other things. Mayor Soderberg stated this puts the assessment back on the property and it is much safer. Councilmember Fogarty asked how many tax dollars annually they are looking at forfeiting. Finance Director Roland stated forfeiting is not the right way to look at it, because ultimately we will get those tax dollars. It would be $2 million over 11 years. It would take the full 11 years at around $126,760 per year for the tax dollars. This would be for the whole project. As the developer's project is laddered, you have these five properties that are the initial plat. You then have the following plats that come on over a period of time. The first year we may have only one property that we are going to abate the taxes on for the $8,000. The second year we may have all five properties which we are collecting the assessments to pay the bonds, but we are also rebating $20,000 or $30,000 back to the developer to cover the cost. The third year we may have 10 properties. It will gradually increase as the property value increases over time. Weare using the flat 11 or 12 years, but in reality the period of time may be extended in order to get where we need to be. Council could choose to do 100% abatement from the start and just pay the developer back as fast as we could, or you could say we are only going to do 50%. It might take longer to pay back the developer, but you would have the other 50% that would pay the City's taxes. It is a choice the Council has to make. Councilmember Fogarty asked if we can choose a time limit versus 100% or 50%. Mr. Inman stated 20 years on any abatement no matter whether you take 100% or 50%. Each one is limited to 20 years maximum. Councilmember Fogarty asked what do we collect in taxes on that property now. Finance Director Roland replied we would collect the taxes on the growth or the difference in the property. That would be the amount that is abated. We would still collect the abated amount plus the base taxes. City Council Workshop July 18, 2005 Page 6 Mr. Inman stated the decision you have to make is do you want to do it and if you do is your goal to pay them back as fast as you can and get them back on the tax rolls or would you rather keep some yourself on an annual basis to help offset the general fund. Mayor Soderberg asked how much additional service will be required by this project, as far as police patrol, etc. City Administrator Urbia stated there are private streets so there is not much more mileage. Mayor Soderberg asked if staff has any idea how much additional burden this development will place on the general fund. Finance Director Roland stated she cannot answer that. Mayor Soderberg asked if the $39 million market value was a reasonable assumption. Mr. Inman thought it was less than the full buildout. Mayor Soderberg stated $39 million is the target market value to generate $126,000 a year to make the payment. Finance Director Roland stated that is half a year's payment. It would actually be $252,000 a year. Mayor Soderberg stated as far as the risk to the City, if the development does not take off and there are only one or two buildings out there then what. Finance Director Roland replied then we pay the bond with levy dollars over the period oftime and we have a lien against the property which is before the mortgage. Councilmember Wilson asked ifthis will be an expectation for future developments. Finance Director Roland replied she does not know what other developers will expect. They can ask. We have provided assistance to developers in industrial and commercial projects in the past. Mayor Soderberg stated we just approved one in the industrial park and we used MSA funds to develop a street. Community Development Director Carroll stated we started using TIP in the early stages in the industrial park and it got to a certain point it had taken off and we just stopped using it. He felt we could do the same thing with abatement. Mayor Soderberg asked ifthis meets the but for test. Mr. Inman replied according to the abatement law, yes. They analyzed their whole proforma. The amount of the assessment is too high for them to sell the property and make any kind of a reasonable return. He is comfortable with the assumptions they gave him. Councilmember Wilson asked ifthe road was taken out ofthe project, would it dramatically change what we need to do with this development. City Engineer Mann stated Mr. Allendorf indicated they do not need the road. From the standpoint ofthe developer not needing those burdensome costs that have met the but for test, that is one way to phrase it. However, it has been and continues to be staffs position and recommendation that the southerly half of the development cannot develop without that access. He asked what portions of the agreement need to be in the development contract and part ofthe contract in order for it to go forward if we are going for an August 1 date. Does the abatement agreement have to be part of it or is it enough for the developer to waive their rights to object to the assessments. City Attorney Jamnik replied the latter. Finance Director Roland stated we will address that in the development contract under the standard wording that would address the fact that we will be assessing for this project and that they waive their right to the assessments. Do we have to mention there would be a future abatement? City Attorney Jamnik replied we would not have to. Finance Director Roland stated the abatement agreement will be a separate agreement. Councilmember Pritzlaff asked if this issue was a factor a year ago. Mr. Allendorf stated as soon as the idea of Spruce Street being assessed to this property came up they let those people know that is a burden they cannot take. Finance Director Roland stated we discussed the assessments for the Spruce Street bridge and extension at a meeting on September 30, 2004 where Gene and Randy Pederson were there, and staff was informed that the $2 million would kill the project. Staffhas worked on ways to go forward from City Council Workshop July 18, 2005 Page 7 there, however, it was not until after the first ofthis year the idea arose to find another way to pay for those assessments. Staffhas known the developer had an issue. What took the time to develop was the but for where they had to come up with why they cannot afford it. Mayor Soderberg asked if staff was comfortable this is minimal risk to the City and the direction we should go. Finance Director Roland replied it is our recommendation at this point that Council consider abatement for this particular project. Councilmember Wilson asked if we were to not abate the project and assume the $2.1 million cost for Spruce Street and the bridge one factor would be to buy down the bondable limit. Finance Director Roland stated you would reduce the amount of debt limit you have left. Councilmember Wilson asked if we would be money ahead over the course of 10-12 years by paying for that on the City's part versus collecting the tax and the assessments along the way. Mr. Inman stated it would still be $2 million. The problem with assessment bonds is you have to be able to assess at least 20% of the proj ect. Mayor Soderberg stated he considers this an investment in the Spruce Street extension and bridge and he would favor doing this. Councilmember Fogarty stated these are special circumstances with the special ponding and money they have had to invest. She is comfortable with the abatement and would like to see it run for a specific number of years. Councilmember McKnight stated the developer will be back with future tax abatement requests for the whole development, the rest of the lots, and that would be $252,000 a year when it is fully built out. He confirmed the developer is leasing the properties. Mr. Allendorf stated it is a combination. Councilmember McKnight stated this is a big red flag to him. However, this commercial development will not happen without it. He would go with the 10 year maximum and hopefully it would take less. He does not want to do this after this development. Councilmember Fogarty agreed. Councilmember Pritzlaff agreed that if we want it we have to invest in it. He thought the issues didn't just arise, so knowing it was a problem in the past makes him more satisfied. He agreed with the abatement for 10 years if that. Councilmember Wilson stated he is not completely comfortable with this. He had to believe there was some type of City risk only for the services that have to be provided. He asked if we can get a rough idea of what we can reasonably expect to have to pay for services out there over the course of an abatement time period. Finance Director Roland stated that would be difficult to determine. Councilmember Wilson stated he would like to proceed cautiously. Councilmember McKnight stated he would like to get it done and back on the tax roles. Secondly, he does not think there is a need for the City to ask the county, school or the state to participate. Councilmember Wilson stated we could set it up for 10 years but it is possible to get to that $39 million in 7.5 years. Mr. Inman stated the note would be written that any additional taxes over the scheduled payment would go to principal and therefore the term is 10 years or when it is paid off, whichever is shorter. Every dollar over the schedule goes to principal and reduces the interest. Community Development Director Carroll stated it is 10 years per parcel. 4. ADJOURN MOTION by Fogarty, second by McKnight to adjourn at 6:08 p.m. APIF, MOTION CARRIED. City Council Workshop July 18, 2005 Page 8 Respectfully submitted, ~7Y7~ Cynthia Muller Executive Assistant