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Missoula Redevelopment Agency 140 West Pine Street Missoula MT 59802 [PHONE REDACTED] phone • [PHONE REDACTED] fax www.ci.missoula.mt.us/mra [EMAIL REDACTED] M E M O R A N D U M TO: MRA Board of Directors FROM: Ellen Buchanan, Director DATE: October 14, 2010 SUBJECT: First Interstate Bank – Request for TIF Reimbursement First Interstate Bank has requested that the MRA Board consider a request for reimbursement for costs incurred as a result of the construction of their new six story office building on Higgins Avenue and Front Street. At the October 17, 2007 Board meeting, the MRA approved a request from the bank to be allowed to Proceed without Prejudice with demolition of existing buildings and construction of the new building while the Front Street URD was being formed. At that time, FIB had identified a series of construction related activities that they believed might qualify for reimbursement from tax increment funds should funds be available. In August of 2009, FIB requested that staff bring the issue of reimbursement to the Board for action to memorialize those activities that would qualify for reimbursement. There were no representatives from the bank in attendance at the meeting to present their request or answer questions; therefore, the item was tabled and subsequently withdrawn verbally by FIB. In the staff memo prepared for that meeting, it was noted that some of the costs were estimates and that there were some unusual costs incurred. One of those anomalies was redesign necessary to protect the Bank Street Plaza at a cost of $100,000. This was necessitated by the discovery during demolition of the old bank building, that the Plaza encroached into the FIB property with a structural tie-in to the building. When this was brought to the Board on August 14, 2009, the costs deemed to be eligible for reimbursement under tax increment law totaled $1,604,835. We have since received revised numbers, as of 9/28/10, totaling $1,777,391 that FIB believes qualify for reimbursement under the law. The bank’s original estimate in their building budget was $1,295,000, based on estimated costs. The primary driver of the increased cost over the 2009 amount is a result of the demolition of the building at 127 E. Front. The 2009 estimate was $167,381 less than actual cost and A/E fees of $51,175 are now included in the request. Additionally, an estimated cost of $25,000 has been added for pavers, bulb outs and street lighting in the right-of-way at 127 E. Front. Several of the estimated costs were ---PAGE BREAK--- less than estimated, but the net result is an increase in the request for reimbursement. The desire by FIB to construct a new multi-story office building at that location was the major catalyst for the creation of the Front Street URD. The primary impetus was the need to provide additional public parking in the vicinity of the project if FIB was going to build more office space than was needed for bank operations. Reimbursement to FIB of costs eligible for tax increment assistance was also a primary consideration in their decision to rebuild downtown. There have been numerous meetings between the MRA and FIB that included discussion about how to handle any reimbursement of TIF eligible costs incurred by the bank as a result of construction on the new building. MRA has struggled for well over a year to determine how much tax increment revenue would be generated as a result of the new building. We received certified values from the MT Department of Revenue in August and were finally in a position to calculate bonding capacity for the parking structure and to identify ways to handle TIF reimbursement to the bank. MRA was subsequently notified by the Department of Revenue that FIB was challenging the valuation of their property, putting the size of our revenue streams in limbo once again. Since there is no certainty as to when the issue of valuation will be resolved, FIB has provided a property tax payment amount of $243,000 that they have stated is the goal that they hope to achieve in any adjustment by DOR and would be the minimum that they would pay, so we are using that number to reevaluate bonding capacity and reimbursement possibilities. Initially, the revenues from the FIB project and improvements to the Wilma were the only generators of significant increment in the new district. MRA staff has maintained the position throughout discussions with FIB that only the increment generated as a result of the FIB project would be used to size the bonds for construction of the parking structure as the first MRA priority and any reimbursement as the second priority. The FIB-generated tax increment revenue number that is now being used is not sufficient to accomplish both of these objectives. However, other properties in the district are now contributing significant tax increment revenues, presumably as a result of reappraisal. Using the minimum tax payment proposed by FIB, their property now equates to 33% of the incremental taxable value of the Front Street URD. As a result of several recent meetings, the following structure has been developed: • The Parking Commission determined last year that they would invest approximately 50% of their cash and bonding capacity to building this parking structure, resulting in $4,500,000 in MPC revenues. • The Parking Commission has recently determined that it is not acceptable to build a parking structure with fewer than 400 spaces and that they ---PAGE BREAK--- would be willing to invest a greater percentage of their bonding capacity in the project in order to achieve a structure of this size. • The MRA has previously obligated revenues from the District to two other projects with multi-year commitments – The Wilma is owed $230,000 in $50,000/year increments and $75,000 in $25,000/year increments was pledged to Caras Park improvements. Staff is recommending that a minimum of 10% of revenues from the District be set aside for administration of the Agency. • There is adequate capacity in the Front Street URD to issue bonds sufficient to build 125 parking spaces if the bond is sized using most of the unobligated revenues of the District. This analysis assumes 125 spaces at $18,000 per space and a 25 year bond issued as a tax exempt Recovery Zone Facility Bond at 4.5% interest. These bonds must be issued by the end of this calendar year in order to take advantage of the Recovery Zone bonding opportunity which enables them to be issued at a tax exempt rate. • FIB has agreed that reimbursement of TIF eligible costs through a subordinated lien note to be amortized over 25 years would be acceptable. • If MRA dedicated FIB’s assumed minimum tax increment to service the subordinated lien note, there is adequate revenue to service $1,604,835 at 5.7% interest over 25 years. This amounts to just under $119,000/year and is the calculation provided by Springsted, the City’s financial advisors, of the carrying capacity of the revenue stream as proposed by FIB and it should be noted that FIB has neither agreed nor disagreed with these terms. • The above scenario for financing the eligible reimbursable expenses uses the $1,604,835 as the principal amount to be reimbursed because that is the number that Springsted used to determine debt service capacity. It should be noted that FIB has now identified $1,777,391 as eligible for reimbursement, based on actual costs as opposed to the estimates used in 2009. We will ask Springsted to run the numbers assuming $1,777,391 using $119,000 in FIB increment for debt service prior to the Board meeting. • If the above assumptions are implemented, the majority of the current revenue in the District would be obligated for the foreseeable future, leaving approximately or less than $20,000, for new projects. Once the Caras Park and Wilma obligations are satisfied, an additional $75,000/year will be available. • This analysis is ongoing and numbers are subject to change before the Board meeting. Time is of the essence if the City is to take advantage of the Recovery Zone Facility Bond opportunity. If we are unable to issue the tax increment bonds before the end of this year, at least a portion of the bonds will be taxable, diminishing their capacity to build as much parking. It is not possible to move ---PAGE BREAK--- forward with this project without resolving the issue of reimbursement to FIB of TIF eligible expenses, as that is a condition for them to transfer the Macy’s property to the Parking Commission. The unanticipated growth of revenue in the District provides the opportunity to satisfy both the need for parking and assistance that will help offset the additional costs to FIB of rebuilding downtown rather than relocating to a less expensive site away from the urban core. One of the most effective uses of tax increment assistance is the use of those funds to “level the playing field” for urban redevelopment and this project is a prime example of that use. Recommendation: Staff recommends that the MRA Board approve an amount to be determined by the Board in expenses incurred by First Interstate Bank for demolition, environmental remediation, redesign associated with the Bank Street Plaza encroachment, utility upgrades and improvements in the public right-of-way as eligible for reimbursement through the use of tax increment revenues generated by the portion of First Interstate Bank’s agreed upon minimum property tax payment of $243,000 that constitutes tax increment which is approximately $119,000. The reimbursement shall be in the form of a subordinated lien note with the terms to be determined in a manner satisfactory to First Interstate Bank and the Missoula Redevelopment Agency.